Only a few months ago expectations were that EMU would consist of only a small number of core countries at the outset, with those European economies on the periphery joining just prior to the implementation of a single currency in 2002. Bond yields reflected this view with the 'ins' like France and Germany sustaining much higher bond prices (and lower yields) than the 'outs' such as Spain and Italy.
However, countries on the periphery of Europe have recently been encouraged by renewed political momentum on EMU and the possibility of a more liberal interpretation of the convergence criteria. For instance, the Italian government is now attempting to cut its budget deficit much more sharply in order to pass the convergence criteria in time to join EMU from the outset in 1999. Spain has similar hopes.
As a result bond spreads within Europe have narrowed significantly with high yielding markets such as Spain and Italy performing much better, and narrowing the spread with countries such as Germany. The UK, also a high yielder, has benefited from this general downward trend in bond yields, with the yield on 10 year bonds falling from around 8% during the Summer to its current level of around 7.5%.