The gap between Greek and Italian government bond spreads turned negative on Thursday for the first time since early 2008, amid expectations political uncertainty will return in Italy while the recognition of economic reforms has boosted Greek debt in recent weeks.
The spread between the 10-year bond yields of the eurozone’s two most indebted states fell as low as -2.4 basis points. It was last at 0.20 bps.
The gap has tightened since the start of the year, when it was at 164 bps.
Greek bonds have rallied all year, and a credit rating upgrade from S&P to BB- with a positive outlook on October 25 has provided an extra boost, so further upgrades may follow.
The eurozone’s rescue fund also recently agreed to allow Greece to repay early some of its debt to the International Monetary Fund, on which it pays higher interest than current market rates, providing a further boost.
If Greece’s economic reforms continue and its rating is raised to investment grade, “the big difference would be that it becomes eligible for ECB purchases,” Didier Saint Georges, managing direct and investment committee member at asset manager Carmignac, told the Reuters asset allocation summit.
“We’re not there yet, clearly, but that’s where the markets are in terms of trajectory.”