Traders are on alert for signs of contagion in Europe’s government bond market after a selloff triggered memories of the region’s debt crisis 15 years ago. France was the clear underperformer as budget squabbling and a contentious election added to global headwinds. On Thursday, French bonds tumbled further along with Italy, Belgium and Greece, recording some of their biggest spread moves in years. Germany, however, withstood the pain as investors piled into the traditional safe haven.
“We are starting to see first signs of contagion,” said Jeff Mueller, co-head of fixed income, Morgan Stanley Investment Management. “If the erratic price action observed on Oct. 1 continues for some time, this may draw some attention from policymakers.”
France has plenty of company in the euro area when it comes to excessive borrowing and large budget deficits. The heavy debt load of countries like Italy and Belgium makes them vulnerable in a world of higher interest rates. To be sure, spreads remain relatively low and the rout largely stabilized on Friday, but investors remain on edge.
Ahead of the weekend, market chatter focused on a possible response from the ECB. One option would be for officials to send a stronger signal that they’ll be more cautious about lifting rates further. If signs of contagion intensify, the ECB may consider pausing its quantitative tightening program, according to Jamie Searle, rates strategist at Citigroup Inc.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing