The peripheral spread is the difference in yield between Spanish, Italian and Portuguese government bonds on the one hand and German government bonds on the other. In order to calculate the peripheral spreads, 10-year government bonds are used for this purpose. Since German government bonds are considered one of the safest asset classes in Europe, the southern countries Spain, Italy and Portugal have to offer investors higher interest rates for the higher risk compared with German government bonds. Although the three southern countries are also advanced industrialized nations, all of them have significantly higher government debt in the form of the debt-to-GDP ratio than Germany. The resulting yield premium is called the peripheral spread and is regarded as a kind of yardstick or indicator of the current risk appetite of market participants. The higher the peripheral spread, the more risk-averse and cautious market participants are at this point in time.
