The levels of risk aversion among investors has precipitated a flight to quality that has forced spreads on European government paper to worrying levels. Italian BTP yield spreads are almost 100 basis points over benchmark German bunds. Ten-year Greek issues are now 120bp above their German counterparts. With funding this expensive for non-core European sovereigns, the European Primary Dealers Association (EPDA) is revisiting an idea first discussed in 2000: a common European government bond. The EPDA argues that since the government bond markets have become so fragmented the benefits of such a product are increasingly apparent, especially to the smaller, lower rated issuers.
The association outlined...
