Corporate bonds and the sovereign-vs-corporate spread

Two bonds on your screen. Both pay 4.5% coupons. Both mature in 2030. One is a BTP. The other is issued by a company you’ve heard of.

Are they the same investment? Not remotely. Today’s lesson is about why corporate bonds pay more than government bonds, what you’re paying for, and the rare but catastrophic history of Italian retail investors holding corporate debt.

The credit spread

A corporate bond typically yields more than a comparable sovereign. The difference is called the credit spread — extra yield as compensation for the chance the company doesn’t pay back.

Typical spreads over sovereigns for similar maturity, 2025:

Rating	Spread over BTP
AAA (corporate; rare)	−0.5 to 0% (some blue chips trade tighter than Italian sovereigns)
AA	0.3-0.8%
A	0.8-1.5%
BBB (investment grade borderline)	1.5-2.5%
BB (junk)	3-5%
B and below	5-12%+

A BBB corporate paying 5.5% when BTP pays 3.5% is priced for ~2% default risk. Markets rarely mispay this much — they usually charge the right spread.

The rating agencies

Three main rating agencies, global reach:

S&P Global Ratings — scale AAA to D.
Moody’s — scale Aaa to C.
Fitch Ratings — scale AAA to D.

All three rate sovereigns and corporates. Ratings are solicited (company pays) or unsolicited. Most publicly-traded corporate debt is rated.

Key rating bands:

Investment grade (IG): S&P AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-. Moody’s equivalent: Aaa through Baa3.
Speculative grade / junk: below BBB- (S&P) or Baa3 (Moody’s). Higher default risk.

Ratings change. Italian sovereign: A- in 2007, BBB+ in 2014 after the debt crisis, BBB in 2017, BBB in 2023. Generally stable-to-slightly-declining over time; still investment-grade.

The ratings are not guarantees. Historical default rates by category over 5-year windows (Moody’s):

AAA: ~0.1% default rate.
AA: ~0.3%.
A: ~0.8%.
BBB: ~2.5%.
BB: ~10%.
B: ~25%.
CCC and below: ~45%.

So an IG bond defaulting over 5 years is possible but rare. A junk-bond default over 5 years is common.

Why corporates yield more

Three specific risks on top of the risk-free sovereign yield:

Default risk. The company fails; you don’t get paid. As above.
Liquidity risk. Corporate bonds often trade less than sovereigns. Selling early can mean a meaningful discount.
Tax disadvantage in Italy. 26% on coupons vs 12.5% for BTP. A corporate has to pay 17% more pretax yield just to match sovereign net yield.

The 26% tax is the one Italian retail investors systematically underestimate. A corporate yielding 4% is 2.96% net — less than a BTP at 3.3% gross (2.89% net). The corporate wins only at meaningfully higher gross rates.

The Parmalat disaster

Parmalat, Italian dairy giant, was one of the largest Italian corporate defaults ever. 2003: exposed fraud, €14 billion in missing assets. Company had issued billions in bonds to retail and institutional investors, all backed by fake bank documents.

Italian retail investors held significant Parmalat bonds thanks to banks pushing them as “safe” alternatives to BTP. When the fraud emerged, bonds became worthless.

Lessons:

Even “stable” companies can fraud. Calisto Tanzi’s Parmalat looked boring. Balance sheet lied.
Retail investors often bought thinking “it’s a real company, safer than stocks.” Actually riskier than stocks because of concentration and lack of diversification.
Italian banks sold Parmalat bonds aggressively to clients — conflict of interest issue revisited by regulators later.

Recoveries came slowly through restructuring; investors eventually got cents on the dollar.

The Lehman connection

2008: Lehman Brothers bankruptcy. Italian retail had been sold Lehman bonds as part of structured products (polizze, obbligazioni bancarie emitted by Italian banks with Lehman underlying). These became near-worthless.

Thousands of Italian retail holders lost significant money. Regulatory response: Consob tightened rules on who can be sold what, the MiFID suitability framework was expanded, Italian banks faced class actions.

Lessons:

Structured products hide credit risks. What looked like “protected capital” had Lehman as counterparty. When Lehman failed, protection failed.
“American bank” wasn’t automatically safer than Italian. Investment banks can fail.
Retail investors were often not made aware of the underlying credit risk — another conflict-of-interest failure.

When corporate bonds make sense

Case 1: You need yield above BTP and are comfortable with moderate credit risk.

Reasonable approach:

Stick to investment-grade (BBB-/Baa3 or higher).
Spread across multiple issuers.
Prefer corporate bond ETFs over individual bonds for small amounts (instant diversification).

Case 2: You specifically want exposure to a sector (banks, utilities, energy) that BTP doesn’t give you.

Same approach but sector-specific.

Case 3: You have a strong view on a specific company. Usually a mistake for retail — you’re betting against professional credit analysts.

Corporate bond ETFs

The better way to own corporate bonds for most retail investors:

iShares Core € Corp Bond UCITS ETF (IEAC): EU investment-grade corporates, ~1,400 holdings, TER 0.2%.
Xtrackers EUR Corporate Bond UCITS ETF: similar profile.
iShares € Corp Bond ESG UCITS ETF: ESG-screened variant.

Benefits:

Instant diversification. ~1,000+ companies in one product.
Professional credit analysis. Index providers filter by minimum rating.
Low cost. TER 0.15-0.25%.
Liquid. Trade like a stock.

Catches:

Taxed at 26% (ETF, not sovereign bond).
Duration risk. Bond ETFs don’t have a fixed maturity; duration persists. When rates rise, NAV falls.
No “hold to maturity” option. You’re always exposed to market price.

For a typical diversified portfolio, a corporate bond ETF as part of the fixed-income allocation is reasonable. Matching or beating this with individual bonds requires significant research.

The “subordinated” trap

Banks and some companies issue subordinated bonds (obbligazioni subordinate). Key feature: in bankruptcy, subordinated bondholders are paid after senior creditors.

These pay higher coupons to compensate. Italian retail investors have historically held significant subordinated bank bonds, often sold by the same banks as “safer than stocks.”

2015-2017 crisis: several Italian banks (Banca Etruria, Banca Marche, CariChieti, Popolare Vicenza, Veneto Banca) were resolved. Subordinated bondholders — including retail investors — lost most or all of their investment. Senior depositors were protected; subordinated creditors were “burned.”

Political firestorm followed. Some partial compensation via FITD was eventually arranged but took years.

Rule: never buy subordinated bonds of the same bank where you have your conto corrente. Concentration risk. And subordinated bonds from any issuer should be a small, conscious part of a portfolio, not pushed by your bank’s advisor as “safe.”

How to read a bond disclosure

Every corporate bond issuance has a prospetto (prospectus) with key info:

ISIN — unique identifier.
Issuer — who’s borrowing.
Size — total amount being issued.
Coupon — rate and frequency.
Maturity — when principal returns.
Rating — if rated.
Covenants — conditions the issuer must maintain.
Subordinazione — where in the capital structure this bond sits.
Special features — callable, putable, convertible.

Retail investors rarely read prospectuses, but KID (Key Information Document) — 3-page summary — is mandatory and accessible. Read it before buying.

Callable bonds: the hidden trap

Some corporate bonds are callable — issuer can redeem early at a predetermined price. Usually they do so when rates fall, so they can refinance cheaper.

From the investor’s perspective: you lose the attractive coupon when rates are low and need to reinvest at new lower rates. Asymmetric payoff — you don’t get the upside of rate falls.

Check for “callable” or “rimborsabile anticipatamente” in the prospectus. A 6% coupon callable in 2 years is less attractive than a 5% coupon non-callable to maturity.

What to do with this lesson

Three habits:

Always check the rating of any corporate bond you consider. Below BBB-: requires a strong specific thesis. BB or worse: don’t unless you know what you’re doing.
Prefer a corporate bond ETF to individual bonds for small to medium investments. Diversification + cost.
Never let your bank sell you subordinated bonds of itself or its peers. If asked, look up the specific bond rating and subordination level. Say no.

Sources

S&P Global Ratings — Default, Transition, and Recovery studies. https://www.spglobal.com/ratings/.
Moody’s — Annual Default Study. https://www.moodys.com/researchandratings/.
Consob — Indicazioni per gli investitori al dettaglio. https://www.consob.it/web/investor-education (retrieved 2025-02).
Banca d’Italia — Rapporti sulla stabilità finanziaria (Parmalat, Lehman sections). https://www.bancaditalia.it/pubblicazioni/rapporto-stabilita/.

Next lesson: stocks — what you actually own — equity, voting rights, dividends, buybacks, and the accounting identity that anchors everything about stock investing.