In a twist that shocked investors around the world, Italy and Greece—once seen as the weakest links in Europe’s economy—have become stars of the global bond market.
A Market Turned on Its Head
This happened even as powerful economies like the United States and Germany are seeing their borrowing costs soar.
Just last month, concerns over huge government spending pushed global bond markets into a frenzy. Normally, countries with shaky reputations like Italy, Greece, and Spain would be hit hardest. Investors used to see them as reckless spenders, full of debt and unable to control their budgets.
But not this time.
Instead, bonds from Italy and its neighbors actually gained in value. The difference in interest rates, or “yield spreads,” between Italian bonds and those from Germany has shrunk to less than 1 percentage point—down from nearly 6 points a decade ago. This means investors now see Italian debt as…
