European bonds stabilized after a week of dramatic swings, with falling oil prices bringing relief from budget worries and abrupt shifts in hedge-fund positioning that whipsawed yields. French bonds headed for their first weekly gain in six and Italian notes for their first in nine as yields across the region fell and Brent crude retreated toward $100 a barrel.
The calm follows moves that saw French 10-year yields swing as much as 16 basis points lower and 18 basis points higher on successive days earlier this week. Confidence is creeping back as a lull in new developments in France and assurances from European Central Bank President Christine Lagarde buoy investor appetite. Crude oil retreated after President Donald Trump said he will hold off on new strikes on Iran before November's midterm elections.
"A sense of normality is returning, with correlations establishing their usual patterns and oil lifting all boats," said Christoph Rieger, head of rates and credit research at Commerzbank AG. The extra yield investors demand to hold French bonds rather than German notes narrowed three basis points to 137 basis points. Swaps implied 72 basis points of rate hikes by the end of next year, down from 75 basis points on Thursday. Lagarde told euro-area finance ministers that officials have the tools to counter unwarranted, disorderly moves.
Investors remain cautious, however, demanding the most compensation to own French bonds over Italian ones since the founding of the euro. Mohit Kumar, chief economist and strategist for Europe at Jefferies, said hedge funds are likely to add to short positions on any rally, while longer-term investors wait for more stability. "We remain short France," Kumar said. "Our concern is more that we see a buyer strike."
Source: Bloomberg Markets · Summarized by HeadlinesBriefing