While the ratings agencies continue to lower their ratings and outlooks of European sovereign debt issuers, investors can't seem to get enough of the paper. Take the case of Spain. Last summer, traders couldn't dump the paper fast enough as spreads on 10-year Spanish sovereign debt widened out to more than 600 basis points above 10-year German Bunds. Now, less than a year later, spreads on that same Spanish debt have narrowed by more than 50% to 294 basis points. This represents the lowest level since December 2011.
Interestingly, the last time spreads on Spanish debt were this low was in late 2011 in the aftermath of the MF Global meltdown, following its poorly timed bullish bets on European debt. The only difference between then and now is that back then spreads were widening out from much lower levels, while today they have come down significantly from even higher levels.