This is something that would have been unfathomable a year ago, or even 6 months ago really.
The Spanish 10-year bond is now trading with a lower yield than US bonds. That means at 10-years, Spain can now borrow money more cheaply than the US can.
Jamie McGeever has the chart which shows the historical spread between 10-year Spanish bonds and US ones.
The chart’s a little blurry, but you can see that in 2012, at one point, Spanish bonds were trading for over 600 basis points higher than US ones (meaning that if the US 10-year was at 2.5%, then the equivalent Spanish one was at 8.5%). This was in the throes of the Eurozone debt crisis, when it looked like peripheral Eurozone countries might default or leave the Eurozone, causing their debt to be denominated into weaker home currencies.
But since those tough days, several things have happened.
One is that the Eurozone vowed to implicitly backstop government debt, which took away the risk of default basically.
Meanwhile, the Eurozone economy has sputtered along, and inflation has dropped to its lowest levels since the crisis, which puts downward pressure on yields. And now just last week, the ECB has taken further steps to reduce interest, causing a further push into peripheral debt.
Now it’s important to note what this doesn’t mean: It doesn’t mean that the market deems the US to be riskier than Spain. US credit default swaps (hedges against default) remain much tighter for the US.
In fact, while Spain has come a long way for the dark days, it’s gotten to the point where plunging borrowing costs are actually a negative sign as they are an artifact of slow growth and deflation. So while this is a major milestone and moment for Spain, it’s not necessarily all good.
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