Italy and Greece have experienced red-hot demand for their bonds during the coronavirus outbreak, underscoring their transformation from high-risk debt markets to unlikely havens.

Both countries’ borrowing costs have tumbled so far this year, as investors have sought alternatives to deeply negative-yielding German debt.

Italian and Greek bonds “are trading like Bunds [German bonds] on steroids: safe bonds but with a bit more yield,” said Antoine Bouvet, a senior rates strategist at Netherlands-based bank ING.

The frenzy has been evident in demand for new debt. Italy racked up more than €50bn of bids, its biggest ever book of orders, for a €9bn sale of 16-year debt last week. A 15-year bond from Greece, the government’s longest maturity since the crisis, attracted €14bn of bids in late January, which was another record order book.

The eurozone debt crisis divided bond markets into a safe “core” and a risky “periphery”, comprising Portugal, Spain and Ireland, as well as Italy and Greece.

The recent behaviour of these markets, which saw them rally even while the viral outbreak triggered a brief sell-off in stocks, suggests that the distinction has collapsed in the minds of some investors. Buyers are now betting that the European Central Bank, which is buying €20bn of bonds a month and intends to keep interest rates below zero for some time, has their backs.

Robert Tipp, head of global bonds at asset manager PGIM Fixed Income, said he expected some kind of return to conditions before the global financial crisis, when debt markets across the eurozone traded more or less in lockstep. Although Greek 10-year yields are at record lows and Italy’s are very close, both countries had funding costs closer to Germany’s before 2008.

“I don’t see why we won’t see them converge again this time,” he said. “We like owning all of them.”

The economies of Greece and Italy are in very different positions. The former has emerged as one of the eurozone’s fastest-growing as it pulls out of a long slump. The European Commission expects Greece to grow at 2.4 per cent this year, compared with just 1.4 per cent for the EU as a whole.

Meanwhile, much of the country’s borrowing, which still amounts to more than 180 per cent of GDP, is in the form of cheap bilateral loans, following a series of bailouts. Bond investors are happy to buy in part because Athens is not counting on them to pay its bills.

Growth in Italy, by contrast, is forecast at just 0.3 per cent in 2020, according to the EC. The country’s debt of more than 130 per cent of GDP is mostly owed to investors, making it Europe’s largest bond market.

What unites the two is their extra yield, known as a spread, relative not only to Germany, but also their former peers in the periphery. In a world of negative interest rates, Greece offers the prospect of enhanced returns for investors who are not constrained by the country’s junk credit rating. Italy, meanwhile, accounts for about half of government bonds across the eurozone with a yield above zero.

For fund managers who measure their performance against a bond index, avoiding Italian debt can quickly leave them lagging behind the benchmark.

“There’s just this dearth of yield in Europe,” said Iain Stealey, international chief investment officer for fixed income at JPMorgan Asset Management. “People are getting forced to search for anything with a positive yield.”

For some observers, this scramble for yield is a side-effect of the ECB’s monetary policy, which has numbed investors to the risks lurking in highly indebted, politically unstable economies.

The recent enthusiasm for Italian debt, for example, was fuelled as much by a setback for the populist Lega party in a regional election in late January as by the broader rush into bonds.

Investors would be foolish to assume that Italy’s bonds are now a one-way bet, and that the country’s volatile politics will not seep back into markets, according to Chiara Cremonesi, a fixed-income strategist at Italian bank UniCredit. “One should be careful as the political premium embedded in the market is now very low,” she said.

A bigger test of the market’s confidence in Italy and Greece could be on the way if the eurozone’s economic slowdown deepens, perhaps as a result of the coronavirus.

“In the past [a broad slowdown] would have caused spreads to widen,” said Mr Stealey. “Now that markets feel they have the support of the ECB, I’m not so sure.”

But this tendency to treat government bonds across the eurozone as safe harbours is likely to have limits. “Bunds on steroids” could quickly revert to the volatile assets of a few years ago if investors become more choosy.

Mr Stealey said: “It depends on how severe a recession we are talking about. If things get bad enough you would get a true flight to quality, and that means just Germany.”

Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.