From the European debt crisis to a hot investment destination: Southern Europe rises from the dead fish, with the bond market skyrocketing.

The latest data shows that the risk premium that investors hold in Greek bonds relative to German bonds has dropped to the lowest level since 2008, and the premium on Italian bonds is also approaching 2010 levels - a sign that the fiscal situation of the region that was once at the core of the Eurozone debt crisis is improving. In fact, the stronger economic growth under the theme of "Make Europe Great Again" is driving peripheral markets in the Eurozone to strengthen. Gareth Hill, fund manager at Royal London Asset Management, said, "The outlook for Southern Europe seems more optimistic than the core European region, and it has attractive yield advantages." Specific performances are as follows: Weaknesses no more Political stability and a credible debt reduction path recognized by investors have benefited Italian bond spreads since the end of 2023 due to the rise in risk assets and the European Central Bank's loose policy. The policy uncertainty under the Trump administration in the United States is also seen as a catalyst for increasing joint defense financing in the Eurozone, easing Italy's heavy debt pressure, while potential foreign capital is seeking new destinations in Europe. Reinout De Bock, interest rate strategist at UBS, said, "I currently favor trading strategies that are long on Italian bonds, not relative to German bonds, but directly long, because German bond prices may rise again." Currently, the yield spread between Italian and German bonds has dropped below 100 basis points, with the spread to France at only 25 basis points, far below the more than 200 basis points in 2022. Benjamin Moulle, global sovereign bond director at French Agricultural Credit Bank, said that more and more clients are increasing their subscriptions to Italian bonds, showing "high confidence in Italy's current economic and political stability." "Mediterranean Club" Although the spread of Italian bonds has narrowed the most this year, sentiment in the entire Mediterranean region has strengthened. In June, the premium of Greek bonds over German bonds fell to the lowest level since 2008, indicating that the Eurozone debt crisis is a distant memory for investors. Greece's bond yields are now almost on par with France, the Eurozone's second-largest economy, which is suffering from political unrest and financial worries. Moody's upgraded Greece's credit rating to investment grade in March, confirming this shift. But the real standout is Spain, with an economic growth rate of 3.2% last year, far exceeding the Eurozone's average of 0.9% and contrasting sharply with Germany's 0.2% contraction. Strong growth enhances debt sustainability, making bond holders feel more secure. Carla Diaz Alvarez de Toledo, financial policy director at the Spanish Ministry of Economy, said, "We are seeing a structural compression of spreads... this has become a structural feature." Fiscal Constraints Although the EU expects Germany's budget deficit to remain near the 3% threshold, Italy's deficit is expected to fall from 7.2% last year to 2.9 by the end of 2026, and Spain's deficit is expected to fall from 3.2% to 2.5%. This is due to the lack of urgency in defense spending in Southern European countries due to fiscal constraints. Unlike Germany, both Italy and Spain have not applied for EU "exemption clauses" to avoid disciplinary procedures triggered by exceeding defense spending limits. However, Italy has called for a greater deficit space to increase defense spending. The EU will provide up to 150 billion euros in loans for joint defense projects through joint bond issuance, benefiting peripheral countries. Hill, who favors Spanish bonds, said, "The pressure on these countries to increase debt issuance is smaller." Beyond Bonds Improved confidence in Europe's future has also buoyed the stock market, with Italian and Spanish stock markets up 15% and 20% respectively this year, and the Stoxx 600 index up nearly 7%. The EU's pandemic recovery fund is benefiting Southern Europe the most, while Germany's plans to increase fiscal stimulus are expected to boost the entire Eurozone. Jacob Falkencrone, global investment strategy director at SEB, pointed out, "European stock markets provide differentiated investment opportunities: Spain has strong short-term economic momentum, Germany has long-term structural catalysts for growth, and France, despite facing short-term resistance, is strategically positioned to benefit from overall European strength." Disintegration risks receding The risk of disintegration of the Eurozone that emerged during the COVID-19 crisis in 2020 has now dissipated. From the market indicator of credit default swaps (CDS) that measures default risks, Italy's five-year CDS is at its lowest level since at least 2010, with Greece, Spain, and Portugal all showing a downward trend. Nevertheless, analysts caution that while the risk of Eurozone disintegration is no longer on investors' radar, France remains a concern, and Spain has recently seen political risk resurface.