7 hrs ago
French Bond Trades Unravel as Politics and Volatility Intensify
Investors had bought French government bonds because they offered better returns than some other bonds.
Many borrowed money to make these bets, expecting French bonds to do better than German ones.
This week, French bond prices fell and their yields rose sharply.
Political worries and a worldwide bond selloff helped unsettle the market.
Some investors then sold their holdings, which added to the pressure.
Some experts say the selling was forced and does not mean France's ability to repay has suddenly changed.
Others warn that political and budget concerns could keep pushing borrowing costs higher.
A few investors think the higher yields may eventually make French bonds attractive to buy.
French bond yields swung sharply Thursday and Friday as investors sold amid market volatility and political concerns.
Hedge funds had borrowed to fund trades buying French and Italian debt while selling German bonds, expecting yield gaps to narrow.
Instead, French and Italian yield spreads widened, and investors unwound positions, contributing to losses and selling elsewhere in European markets.
Analysts cited a poorly received budget plan, Marine Le Pen's widening poll lead and a global government-bond selloff as pressures on French debt.
Some investors see higher yields as a buying opportunity, while others warn that further selling and political risks could push borrowing costs higher.
- Who
- Investors, including hedge funds and foreign holders of French government debt.
- What
- French bond trades suffered losses as yields and the gap between French and German borrowing costs rose sharply.
- Where
- European government-bond markets, especially France and Germany.
- When
- The sharpest selling occurred Thursday and Friday; political concerns include next year's presidential election.
- Why
- Bond-market volatility, investor position unwinding, concerns about France's budget and politics, and a global selloff in government debt.
Buying opportunity and forced selling
Further risks to French debt
What drove the selloff
Buying opportunity and forced selling
Some investors, including Robert Tipp of PGIM, said forced selling drove the move rather than a fundamental change in France's creditworthiness.
Further risks to French debt
Other market observers pointed to France's fiscal position, political uncertainty and the poorly received budget plan as reasons borrowing costs could rise further.
Whether to buy French bonds
Buying opportunity and forced selling
Some investors said higher yields could create an opportunity, with the European Central Bank ultimately backing eurozone government bond markets.
Further risks to French debt
Other investors cautioned that crowded positions could trigger more selling, and that yields could rise significantly further.
Key facts
- French government bond market
- The article describes it as a 3.5 trillion-euro market, the largest in Europe.
- Foreign ownership
- More than half of French government debt is owned by foreign investors, according to MUFG.
- French-German 10-year spread
- It reached 1.55 percentage points Friday; its cited November 2011 peak was 1.81 percentage points.
- Short-term yield moves
- French short-term bond yields moved by as much as 0.40 percentage points over Thursday and Friday.
- Common trade
- Investors bought French and Italian government bonds while selling German bunds.
- Market context
- A broad government-debt selloff was linked in the article to faster U.S. growth, inflation and rising energy prices.
Quotes
Hank Calenti
Fixed-income strategist at SMBC in London
“It’s been a slow bleed until this week, until the last two days, which suggests people were starting to get tapped on the shoulder by risk managers and told it’s time to vacate.”
livemint.com
“It looks like it’s got the potential for a French government bond crisis in the making.”
livemint.com
Sources
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