The correlation between the German and Italian/Spanish yields has risen significantly over the recent months and is back to levels unseen since 2008/2009 (i.e. before the Eurozone crisis). For instance, the correlation between the German 10 year yield and the Italian 10 year yield over the last 30 trading days is back to 81% ! This makes easier carry trade strategies.
Since the ECB’s announcement of the OMT programme in August 2012, credit risk premiums have decreased considerably for the euro zone’s peripheral countries in spite of persistently weak fundamentals (nine consecutive quarters of economic contraction in Spain at Q2 2013, eight in Italy).
Strategy and Economic Research at Amundi
According to the Eurostat Nominal House Price Index, housing prices in the eurozone in the second quarter of 2013 were 6.5% below their peak from the second quarter of 2008. Nonetheless, a 0.3% rebound (coincident with a rebound in the EU’s GDP) was seen from the first quarter of 2013, when prices hit a near five-year low. However, the eurozone aggregate figure on residential housing prices conceals significant differences among member states.
CFA, Strategy and Economic Research at Amundi
Interest rates in Spain and Italy are moving in unison Investors seem to think that credit risk premiums are closely linked. Yet the growth patterns of the two countries differ greatly. And many investors have increased their positions in Italy since last summer (sovereign debt, corporate debt, equity markets) at the expense of Spain in particular. Is this justifi ed by the risk exposure? Are investments in Italy ultimately less risky than investments in Spain?
Head of Macro Economics