Italian and Spanish spreads widen—another sign of Europe weakening?


Nov. 26 2019, Updated 1:44 p.m. ET

Italy adding to Europe’s economic woes

On October 16, Italy’s leading financial index fell by 1.2%, strengthening the market’s belief that Europe is weakening. Worsening economic data, an extravagant debt-to-gross domestic product ratio, a burgeoning unemployment rate, and a very low inflation rate are some of the key factors that have instilled negative sentiments in investors in ETFs (exchange-traded funds) that track European equities. These ETFs include the Vanguard FTSE Europe ETF (VGK), the iShares MSCI EMU Index Fund (EZU), the iShares MSCI Germany Index Fund (EWG), the iShares MSCI EAFE ETF (EFA), and the iShares MSCI Italy Index Fund (EWI).

Part 1 of this series highlights how the performance of the VGK, EZU, and EFA has rapidly sunk over the last three months.

Italy bond spread

Recently, European markets saw the spreads for Italian and Spanish ten-year government bonds widen relative to German sovereign bonds. This widening indicates faltering investor confidence in the future of the Italian and Spanish economies.

Italy’s bond spreads widening

Italy’s ten-year government bonds spread against Italy’s ultra-safe German counterpart closed at 176 basis points on October 16. Yields on ten-year Italian bonds reached as high as 2.71% that day and closed at 2.58%—levels we haven’t seen since February as the spread widened.

Looking at the last six months, spreads for Italian ten-year bonds against German ten-year bonds have fluctuated around a mean spread of 155 and a median spread of 156 basis points. Currently, the spread has widened much beyond its six-month mean or median level, closing at 175 on October 20.

Spain bond spread

Spain spreads widening

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Recently, the spread for long-term (ten-year) Spanish bonds over corresponding German bonds has also widened. The mean and median spread for the Spanish Government’s ten-year bonds against the German government’s ten-year bonds over the last six months has been 139 and 140 basis points, respectively. The spread was 142 basis points on October 20.

To learn more about the investment climate and the state of the economies in Spain and Italy, read our Market Realist guide to investing in the PIIGS nations.


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