In a twist that shocked investors around the world, Italy and Greece—once seen as the weakest links in Europe’s economy—have become stars of the global bond market.
A Market Turned on Its Head
This happened even as powerful economies like the United States and Germany are seeing their borrowing costs soar.
Just last month, concerns over huge government spending pushed global bond markets into a frenzy. Normally, countries with shaky reputations like Italy, Greece, and Spain would be hit hardest. Investors used to see them as reckless spenders, full of debt and unable to control their budgets.
But not this time.
Instead, bonds from Italy and its neighbors actually gained in value. The difference in interest rates, or “yield spreads,” between Italian bonds and those from Germany has shrunk to less than 1 percentage point—down from nearly 6 points a decade ago. This means investors now see Italian debt as far less risky.
According to Patrick Barbe, a senior portfolio manager at Neuberger Berman, the environment for these so-called “peripheral” countries is much better now. “They’ve exceeded their fiscal and deficit expectations,” he said, noting that growth has also been stronger than in many wealthier countries.
Bond Battle: New York Attorney General Seeks to Void Trump’s $175 Million in Civil Fraud Case
From Fiscal Outcasts to Market Darlings
What changed? In short: discipline, growth, and political will.
After years of struggling with debt crises, Italy, Greece, and Spain had no choice but to get serious about their finances. Harsh austerity measures led to budget reforms that are now bearing fruit. At the same time, larger economies like the U.S. and Germany have started to loosen their belts—borrowing heavily to spend on military and infrastructure.
That contrast has made all the difference.
Italy, for example, once known for chaotic politics and sluggish growth, is now attracting record amounts of foreign investment. Investors like Barbe and his colleague Yanick Loirat even bought Italian government bonds—called BTPs—during a recent market panic, betting the yields would continue to fall.
In fact, Italy’s 30-year bond yield dropped to 4.3%, while the U.S. equivalent rose above 5% for the first time since 2023. The U.S. also lost its final triple-A credit rating recently, while Italy and Greece were upgraded. Italy now sits at BBB+ with S&P Global Ratings, just three levels above junk, and Greece is rated BBB.
China’s Historic Dump of $53 Billion US Treasuries is Unprecedented Blow to US Economy
Meanwhile, France—once grouped with the most trusted borrowers—is seeing its bond yields rise. French 10-year borrowing costs are now even higher than Spain’s and only slightly below Greece’s.
A key reason for this change is Germany itself. Under Chancellor Friedrich Merz, the country has backed away from strict spending rules and plans to pour money into defense and rebuilding infrastructure. That means more borrowing, and more debt—making Germany less appealing to cautious investors.
“It reflects greater issuance from Germany due to their fiscal plans,” said Priya Misra, portfolio manager at J.P. Morgan Asset Management.
The Data Behind the Shift
The numbers tell a powerful story.
Italy’s bond spread over Germany, known as “lo spread,” is now down to just 0.92 percentage point. This is a far cry from the 2011 debt crisis when the spread spiked and led to political upheaval in Rome.
Bond indexes confirm this dramatic turnaround. A Bank of America index that tracks bonds from peripheral euro-area countries—Italy, Spain, Ireland, Portugal, and Greece—has jumped 2.3% since April. It’s heading for its best quarter since 2020. In comparison, bonds from the G7 group of wealthy countries haven’t moved at all.
In stock markets too, these “former underdogs” are shining. Spain, Greece, Slovenia, and Poland are among the top 10 stock performers globally this year when measured in U.S. dollars.
Even European politics may feel the impact. A more balanced bond market across the region could make it easier for the European Union to raise money jointly, especially as the U.S. reduces its global commitments.
Japan’s $1 Trillion Trump Card? Treasury Holdings Thrust Into U.S. Trade Spat
Yet, the picture isn’t perfect. Italy and Greece still have very high overall debt levels. That means they’re spending large chunks of their budgets on interest payments. And if interest rates globally keep rising, that could become a bigger problem.
Still, investors like Felipe Villarroel of TwentyFour Asset Management see the gains as well-earned. “Budget deficits have all moved in the right direction,” he said. “Spreads have tightened in the periphery and for good reason.”
