Euro Rates Watch: Correction of peripheral spreads is looming

by: Kim Liu , Aline Schuiling , Tomas Kinmonth

  • Spreads of Spain, Italy and Portugal have narrowed during the holiday season …
  • … while political risks have remained elevated, ….
  • … Q2 GDP growth disappointed in high-debt countries Portugal and Italy …
  • … and the banking systems of Italy and Portugal are not in good health
  • Peripheral spreads benefited from premature speculations that the ECB will abandon its capital key
  • Consequently, we expect 10 year government bond yields over Bunds to rebound and close the year at around 120, 150 and 350bps for Spain, Italy and Portugal respectively
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