Italian, Spanish, and Greek bonds—once at the heart of the Eurozone debt crisis—are staging a comeback that's catching investors off guard. Yields across southern Europe have tightened dramatically, with Italy's 10-year spread over Germany now just 0.9 percentage points and Spain borrowing at a lower cost than France. Greece, long the region's fiscal pariah, is down to a 0.7-point spread. Bond managers say this relentless rally could be fueled by stronger-than-expected economic growth, post-Covid tourism tailwinds, and rising German yields, which have narrowed the gap across the board. For now, it's a convergence trade that's working.
Behind the scenes, several trends could be setting the stage. Investors are leaning into the idea that risk premiums in Europe's so-called periphery may not reflect today's fiscal realities. Greece's return to investment grade in 2023, Meloni's cautious stance in Italy, and Spain's GDP outperformance have helped turn the narrative. Add in the market's growing comfort with shared EU debt—and even speculation around future common bond issuance to support Europe's defense push—and you've got a setup where southern Europe isn't just surviving, it's possibly leading.
Still, not everyone's buying the optimism. Debt-to-GDP ratios remain stubbornly high across Italy, Greece, and Spain, and some fund managers argue the market could be underestimating long-term fiscal fragility. “Investors may be missing the forest for the trees,” one warned, pointing to the irony of seeking shelter in the most indebted corners of Europe just as global bond markets grow jittery. But with volatility rattling US Treasuries, UK gilts, and even German bunds, southern Europe's debt could be finding unexpected fans—at least for now.
