Corporate bonds normally yield more than sovereign debt since companies are seen as more likely than states to go bust. But during the euro zone debt crisis, when various governments had to be bailed out, that relationship broke down in Spain and Italy.
Madrid and Rome are paying more to borrow in the market than similarly-rated companies generally. Ten-year Spanish and Italian sovereign bonds offer a comfortable premium of more than 60 basis points over a basket of BBB-rated corporate debt, even though that gap has more than halved from this year’s highs.
Spain and Italy are also paying more to borrow in the market than BBB-rated companies in their own countries. Calculations by Fathom Consulting using Thomson Reuters data show the average yield for 10-year Italian corporate debt within the euro zone basket is 2.4 percent versus 4.06 percent in the equivalent sovereign. For Spain, the average BBB corporate yield is 2.00 percent – also below a sovereign yield of 4.03 percent.
This shows that even though the risk of a break-up in the euro zone has all but vanished, the market, historically, is still in anomalous territory. Spanish and Italian sovereign yields overtook their equivalent on the basket of corporate debt in 2010 when the euro zone debt crisis took hold.