Key Takeaways
- • French government bonds were on track for their first weekly gain in six weeks, while Italian debt was heading for its first advance in nine weeks, according to Bloomberg.
- • The spread on French over German bonds narrowed by three basis points to 137 basis points, while the premium on French bonds over Italian debt reached its widest level since the euro's creation.
- • Jefferies chief economist and Europe strategist Mohit Kumar said hedge funds were likely to use any rally to add short positions, and that he remained short French government debt.
- • Interest-rate swaps priced in 72 basis points of ECB tightening by the end of next year, down from 75 basis points on Thursday.
- • France's debt agency plans to sell up to €12bn of medium-term bonds at an auction scheduled for the following Thursday.
Summary
European government bond markets regained some stability at the end of a volatile week, as easing Brent crude prices, which retreated towards $100 a barrel, and a pause in fresh developments in France helped calm investor concerns over fiscal risks and shifting hedge fund positions, according to Bloomberg. French government bonds were on track for their first weekly gain in six weeks, while Italian debt was heading for its first advance in nine weeks. The week had been marked by sharp swings: French 10-year yields fell by as much as 16 basis points before rising 18 basis points on successive days.
The improvement reflected easing political and fiscal concerns in France, while European Central Bank President Christine Lagarde reassured officials that the central bank had the tools to address unjustified and disorderly market movements. Oil prices also fell after US President Donald Trump said he would postpone further strikes on Iran until after November's midterm elections. The yield premium investors demand to hold French debt over German bonds narrowed by three basis points to 137 basis points. Expectations for further ECB tightening also eased, with swaps pricing in 72 basis points of increases by the end of next year, compared with 75 basis points on Thursday.
Investors remain wary of France's fiscal outlook. The premium required to hold French bonds over Italian debt has reached its widest level since the euro's creation, underscoring continuing concern about French sovereign risk. Mohit Kumar, chief economist and strategist for Europe at Jefferies, told Bloomberg that hedge funds were likely to use any bond rally to increase short positions, while longer-term investors remained reluctant to return until conditions stabilised. Kumar said he remained short French government debt, arguing that the central concern was not an impending sovereign crisis or debt restructuring, but the risk of insufficient investor demand for French bonds.
Kumar added that French yields would need to rise to around 200 basis points above German equivalents before the ECB was likely to move beyond verbal assurances to more substantive intervention. France's debt management agency announced on Friday that it planned to sell up to €12bn of medium-term bonds at an auction scheduled for the following Thursday, placing further focus on demand for French sovereign issuance.
The improvement reflected easing political and fiscal concerns in France, while European Central Bank President Christine Lagarde reassured officials that the central bank had the tools to address unjustified and disorderly market movements. Oil prices also fell after US President Donald Trump said he would postpone further strikes on Iran until after November's midterm elections. The yield premium investors demand to hold French debt over German bonds narrowed by three basis points to 137 basis points. Expectations for further ECB tightening also eased, with swaps pricing in 72 basis points of increases by the end of next year, compared with 75 basis points on Thursday.
Investors remain wary of France's fiscal outlook. The premium required to hold French bonds over Italian debt has reached its widest level since the euro's creation, underscoring continuing concern about French sovereign risk. Mohit Kumar, chief economist and strategist for Europe at Jefferies, told Bloomberg that hedge funds were likely to use any bond rally to increase short positions, while longer-term investors remained reluctant to return until conditions stabilised. Kumar said he remained short French government debt, arguing that the central concern was not an impending sovereign crisis or debt restructuring, but the risk of insufficient investor demand for French bonds.
Kumar added that French yields would need to rise to around 200 basis points above German equivalents before the ECB was likely to move beyond verbal assurances to more substantive intervention. France's debt management agency announced on Friday that it planned to sell up to €12bn of medium-term bonds at an auction scheduled for the following Thursday, placing further focus on demand for French sovereign issuance.
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