The focus in the eurozone is increasingly insular, with France front and centre and setting the mood. Here too, there has been some market stability – but at uncomfortable levels. The standout move has been a doubling of the French 10yr swap spread from the 60bp area to the 120bp area. And French spreads to Germany are practically as wide as they’ve ever been since the dawn of the euro, even versus the immediate pre-EMU years. The safe narrative to reach for is the debt dynamics one, and the lack of ambition to correct it. Made worse, in fact, by the political options being offered for 2028.
This is probably overdone, as a swing to the right (should it occur) could have some tail positives that aren’t currently properly discounted. Look at the improvement seen in Italian spreads following the rise of Prime Minister Giorgia Meloni. It’s been gradual but persistent, and has not been overly impacted by French concerns. In that sense, the Italian response has been low beta in characterisation, which is good.
In fact, the first real bout of widening in French spreads can be traced back to President Emmanuel Macron’s election gamble of mid-2024. Things subsequently calmed, but were not forgotten. The recent spike is an amplification and extension of an underlying tension that has not gone away. So, overdone? Probably, yes. But we also remain in a danger zone for bonds generally. Just like in the US, more overshoots to the upside are entirely foreseeable.