Spain’s risk premium—the spread between the Spanish 10-year government bond and the German Bund, long seen as the safest benchmark—slipped below 70 basis points on Friday. It marked the lowest level since January 2022. The move followed the European Central Bank’s Governing Council decision to cut interest rates by 25 basis points, the third reduction this year and the second in a row.
The yield on Spain’s 10-year bond stood at 2.88% in the secondary market, compared with 2.183% on German debt. As a result, the risk premium sat at 69 basis points, well below Italy’s 118 and France’s 73. For the first time since 2008, when the great financial crisis erupted, the Spanish 10-year yield traded at a higher price than the French at the end of September this year. Specifically, Spain’s long-term debt yielded 2.94% while France’s stood at 2.947%. The risk premium for the Spanish 10-year moved to about 79.4 basis points provisionally on Thursday, with the French premium about 0.7 basis points higher.
Monetary policy remains restrictive
The decline in the risk premium reflects the euro area policy steps. The ECB met expectations by confirming a rate cut that leaves the main deposit facility in a range of 3.25% to 2.5%. Analysts expect additional reductions in December, as the economy remains weak and the central bank stays on a clearly restrictive path.
The ECB President, Christine Lagarde, justified the decision by pointing to the latest euro-area data. Inflation has run below forecast, which has increased the central bank’s confidence that inflation will move toward the 2% target over the medium term. At the same time, economic activity has been weaker than anticipated, a combination that gives the ECB room to cut rates more quickly than initially planned, while still avoiding recession according to available information. (ECB statement, 2024)
“Starting in December, the ECB is expected to cut at each meeting, moving toward the 2.25% target by the end of 2025,” said Martin Wolburg, senior economist at Generali AM. Economists at AXA IM, Hugo Le Damany and François Cabau, anticipate a quarter-point reduction at every meeting through June 2025. An abrdn economist, Felix Feather, notes that the way the ECB framed the decision reinforces expectations of three more cuts by March 2025. He adds that a potential inflation shock from tensions in the Middle East could prompt the ECB to act with extra caution. (Analysts’ notes, 2024)
In markets, the combination of subdued inflation and fragile growth continues to anchor the eurozone’s policy path in gradual easing. Traders weigh the balance between cooling inflation and slower economic momentum against geopolitical risks and energy prices, all within the context of ongoing monetary accommodation. The Spanish debt market is likely to remain influenced by broader euro-area moves, while investors monitor how the dynamics of inflation, growth, and policy will evolve in the coming months.