Although the euro failed to start 2014 on a strong note, it was a different story forperiphery bonds. As of the European close on Friday January 3rd, the spread betweenthe 10-year papers of Spain and Italy over Germany had both narrowed to below200bp, i.e. their ‘sovereign risk premiums’ are now back down to 2010 levels. Giventhe tightening has been accompanied by general euro resilience, it is a strong indicationthat external investors are returning to the market in search of carry. Current trends donot help downside EURUSD views, barring perhaps a ‘hawkish’ Fed shock. Nonetheless,even while the structural underpinnings of the ‘improvement’ may prove sustainable,whether they are acceptable – to the ECB and governments alike – is another matter.
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