Trading in Bermuda’s Government bonds is seeing renewed interest.The credit spread or difference in yield between the equivalent benchmark US Treasury bond tightened, suggesting a renewed confidence in the Bermudian economy. Bermuda is currently rated AA- by the Standard & Poor’s credit rating agency.According to a source in a global investment bank, “This narrowing of the spread (seen over the last few weeks) may be an indication that investors are taking a more favourable view regarding the outlook for Bermudian economy.”The source, however, cautioned that Bermuda Government bonds, because of their high yield and relatively high credit rating, are not very liquid so it is important to look at this development in that context.The bond is benchmarked against a similar maturing US treasury bond, which is perceived to be ‘risk free’. The difference in yield is basically an indicator of the credit worthiness of the insurer — in this case, the Bermuda Government. The much higher yield at issue versus similarly rated issuers resulted in the issue being four times oversubscribed.The source added that a sustained tightening of this spread would be a better indicator of market sentiment and an important indication of the Bermuda Government’s funding costs going forward.In June 2012, the Bermuda Government raised nearly half-a-billion dollars in the bond sale, which are due on January 3, 2023. Of that, $180 million represented new debt for the island.That sale took place on the same day as Fitch downgraded Bermuda’s sovereign bond credit rating to AA from AA+.Just last week ratings firm Moody’s put Bermuda on a downgrade watch. A lower credit rating can increase a government’s borrowing costs, as investors demand higher interest rates to lend to lower-rated countries. Moody’s placed Bermuda’s Aa2 rating on review for possible downgrade in the first week of April, citing concerns at the rise in government debt and the island’s ongoing recession.The New York-based Moody’s Investors Service reported: “The review is prompted by the steep rise in government debt since the global financial crisis and by the prospect of further rises in the coming two years. In addition, the island's economy remains in recession, making efforts to correct the fiscal deterioration more difficult.”That warning came only days after Standard & Poor’s weighed in and said it too might downgrade the island’s credit rating. Standard & Poor’s affirmed Bermuda’s ‘AA-/A-1+’ long and short term issuer credit rating last Thursday, but revised its outlook from ‘stable’ to ‘negative’.