Credit spreads in Italy and Spain are likely to rise further

The average yield spread of 10-year Italian and Spanish sovereign bonds over German Bunds has surged by almost 20 basis points over the past month. We suspect that it may rise further. One reason for this is that the spread remains lower than that of similarly-rated US corporate bonds over US Treasuries, which has also increased. Admittedly, investors may be expecting the credit ratings of Spain and Italy to be upgraded. However, we consider this unlikely given the economic outlook and debt dynamics of these countries, particularly Italy. (See our European Economics service for more.)