The Spanish risk premium falls to February 2021 levels and stands at 57 basis points.

The risk premium on long-term Spanish debt relative to German bonds fell this week to levels not seen since February 2021, reaching 57 basis points, according to market data.

Although the Israeli-Iranian airstrikes raised the risk premium to 62 basis points on Friday, market analyst Manuel Pinto believes several factors explain its recent decline, such as Germany's decision to dedicate nearly €1 trillion to defense and infrastructure spending.

Thus, he noted that "it is logical to think that new bond issues are needed to finance this, which drives up the yield on German bonds" and contributes to reducing the risk premium—the interest rate differential that investors demand for sovereign debt compared to other debt, in this case German debt.

He also commented that this decline in the premium is due to the fact that investors are beginning to look at assets other than those in the United States.

This trend is influenced by the fact that "the euro is gradually gaining ground - this year it has risen around 11% and its value has fallen from $1.035 to $1.15 - and regional investors see no point in investing in American or other countries' bonds due to currency volatility and high debt levels."

Renta 4 Gestora's Fixed Income analyst, Paula Sampedro, agrees, explaining that the spread has narrowed due to "the shift in fiscal policy that Germany has made this year, which will entail greater debt" and a greater supply of German bonds, which has boosted their profitability.

Atl Capital's managing partner, Félix López, commented that the decline in the risk premium is due, above all, to the "growth differential between the two economies, which was very favorable to Spain in the years following the pandemic."

Furthermore, López highlighted "the strong influx of money from institutional investors into peripheral countries (Italy leading the way)" and the "modification of fiscal rules in Germany," a country now more permissive with "debt issuance and deficits."

For Alfredo Jiménez, Director of Studies at the Spanish Institute of Analysts, this behavior of the risk premium can be explained by the weakness of the German economy, which "is growing at a weak rate of 0.4% ," while in Spain, GDP is increasing at a rate of 2.8%.

He also commented that the appreciation of the euro against the US currency "makes investing in dollars attractive and therefore makes selling German bonds and buying US bonds attractive," which ultimately affects the Spanish risk premium.

ING Spain's Director of Investment Strategy, Francisco Quintana, has cited the war launched by Russia in Ukraine, when the risk premium rose to 135 basis points, to explain the situation.

Thus, he specified that since then, "the risk to peripheral countries has been reduced " because Germany no longer has the "flow of cheap energy from Russia" and is also affected by geopolitical factors, and its economy is weakened by the energy transition, which is damaging its industrial fabric.

For BIG Banco analyst Joaquín Robles, the new German government's economic plans imply increased spending and deficits, which is why it is demanding higher yields on its bonds and reducing the excess cost (risk premium) of its debt.

He also noted that the risk premium's decline—it started the year at 69 basis points—was also influenced by the varying degrees of economic growth (in Spain, tourism and services are the main drivers, while in Germany, the manufacturing sector is stagnant).

Regarding the possibility of the risk premium falling into negative territory, as happened last time on November 10, 2006, Félix López stated that " it is very difficult at the moment, although not impossible," and that this could occur if structural changes occur that worsen the German economy.