French bond stress intensified as a broad risk-off move swept global markets, with investors seeking safety in German bunds and US Treasuries. The premium on French 10-year bonds over Germany increased by 15 basis points to 174 basis points, the highest since 2011. Italian bonds also came under pressure, with its German yield gap widening by 11 basis points to 127 basis points. France has been at the forefront of bond market anxiety this month on concern that lawmakers will struggle to address the country’s heavy debt burden at the same time that protesters are clashing with police over the cost of living. Paris police banned demonstrations Thursday in some areas of the city, citing the risk of violence.
While French spreads are at levels similar to those during the European debt crisis, there are several key differences to that time. For one, some investors have said moves aren’t disorderly enough to warrant emergency action. Mario Draghi, former head of the European Central Bank, echoed that view recently, saying policymakers are unlikely to step in any time soon with intervention. Europe has stronger backstops in place than in the 2011 era and France lacks the banking stresses that engulfed countries like Greece, according to Craig Veysey, a portfolio manager at Guinness Global Investors.
Still, Veysey is bearish on European debt and believes there’s room for yields to shoot higher. In his view, there’s a risk that even German bonds get swept up into wider European selloff, especially if markets start to anticipate that Germany needs to help the more indebted countries. “The potential for Germany having to subsidize other governments in the future, perhaps having to issue more debt as a result themselves — I think those sorts of issues start to accumulate in investors’ minds,” he said. “The markets might think that’s a possibility at some point.”
Veysey, who ran fixed income at Sanlam Investments during the euro crisis, has cut his exposure to Italian and German debt, in favor of UK gilts and Treasuries. Franklin Templeton Sees Risk of Euro Debt Crisis Worse Than 2012. Worries about AI investment and higher oil prices triggered a broad risk-off move on Thursday. French 10-year bond yields jumped 12 basis points to 5.13%, the highest since 2002. There are few obvious triggers to restore confidence, according to Allspring Global Investments. “The levels are interesting, 5% is obviously something that draws notice,” Henrietta Pacquement, fixed income chief operating officer at Allspring, said in a Bloomberg Television interview. “But we’ve got the hurdle of the elections next year and that’s still a few months away.”
Source: Bloomberg Markets · Summarized by HeadlinesBriefing