Less than a decade ago, investors could barely be compensated enough to hold the bonds of Spain and Portugal for fear the nations could be severed from the European Union. Now, they are a hair’s breadth away from having to pay for the privilege.

An unprecedented surge in sovereign debt across the world has driven 10-year yields in the Iberian nations to record lows just shy of 0%. With about $16 trillion of global debt now paying negative rates, investors are snapping up positive yields wherever they can find them -- even if that means getting into some of the euro area’s riskier markets.

While that marks an extraordinary turnaround for countries once on the brink of bankruptcy, it also highlights a new era for bond markets where yields are perpetually low and central banks can do little to revive inflation. And it comes with its own perils -- the growing fear that a bond bubble is in the making.

“I am afraid all curves are going to zero and all rates are going to zero,” said James Athey, senior investment manager at Aberdeen Standard Investments, who currently has no positions in the debt of Spain or Portugal. “It would be an incredibly concerning signal.”

Yields have turned negative in the highest-rated euro-area markets, as pessimism deepens over global growth prospects. The rally is also being fueled by rising expectations of policy easing by the European Central Bank. The ECB should come up with an “impactful and significant” stimulus package at its next meeting in September, policy maker Olli Rehn was reported as saying on Thursday.

“In a regime of financial repression, this is normal,” said Jorge Garayo, a fixed-income strategist at Societe Generale SA, referring to the ultra-low yields. “The big question is how the whole thing unravels over time. Lower yields incentivize more borrowing when debt levels are already at high levels.”

Ten-year yields fell below 0.1% in both Spain and Portugal last week -- a far cry from highs of almost 8% and 18%, respectively, seven years ago when the nations battled a debt crisis and had to accept financial rescue packages from either the European Union or the International Monetary Fund. For both countries, the yield spread over Germany, a key gauge of risk, touched a record low of 60 basis points last month.

While the Iberian nations’ sovereign debt ratings are still well below those of top-ranked countries such as Germany, they have recovered from the post-crisis lows. Spain is currently rated Baa1, or three notches above junk, at Moody’s Investors Service, after being cut as low as Baa3 in 2012. Portugal is now at Baa3, the lowest investment grade, after recovering from a drop into the junk category.

The two countries still have elevated levels of debt, an indicator of relatively high risk, with Spain’s liabilities amounting to 98% of output and Portugal’s running at 126%.

Iberian bonds have also drawn strength from the region’s economic comeback. Despite patches of political uncertainty, such as the Catalonia crisis in 2017, the two nations have consistently posted some of the euro area’s highest growth rates. Portugal and Spain saw their economies expand 1.8% and 2.3% respectively in the year through June, compared to stagnation in Germany.

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