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Spreads on the debt of sovereign European countries have been falling like a rock recently, especially in Italy and Spain. Current spreads on the 10-year sovereign debt of Italy are trading at just 247 bps above 10-year German paper. This is the lowest level since summer 2011, and it's less than half of the peak level that spreads reached in late 2011. Spreads on sovereign debt in Spain are down by a similar amount. After peaking at a level of 633 bps last summer, spreads are down by nearly 300 bps and near their lowest levels since last spring.

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While spreads are down, the actual yields are not down by quite as much. This is because yields on 10-year German debt have been quietly on the rise and are currently at a level of 1.68%. While this is up off the summer lows, yields are still much closer to their two-year lows than their two-year highs.

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