The rates on 10-year BTPs continue to remain above the psychological threshold of 4%, causing the BTP-Bund spread to rise above 158 basis points, dangerously close to 160 points.
This situation reflects the growing pressure on Eurozone government bonds, with an increase in yields also observed in other Eurozone countries.
Inflation and global markets in tension
Financial markets are buzzing as major election deadlines and key economic data approaches. Indeed, France, Italy and Spain are in the spotlight for the next inflation reportswhile in the United States we await with trepidation the diffusion of the PCE core index, the indicator preferred by the Federal Reserve for monitoring price trends and guiding decisions on interest rates.
This combination of political and economic factors is generating a climate of uncertainty that is causing investors to reevaluate their positions in fixed income markets.
Sales of German BTPs, OATs and Bunds
The pressure is not sparing eurozone government bonds. Italian BTPs, along with French OATs and German Bunds, are the subject of massive sales, which are pushing their yields up. The rates of 10-year BTPs have again exceeded the 4% threshold, with an increase of over 2 basis points, while the yields of French bonds stand at 3.293%. Even German Bunds, considered the safe haven par excellence, see their 10-year rates rise to 2.449%.
The influence of the French elections
The French elections, scheduled for June 30, are adding further uncertainty to the markets. The wait for the election result is already having a significant impact, with BTP rates following the trend of French OATs. The BTP-Bund spread has thus followed the rise of the OAT-Bund spread, with the latter exceeding 83 basis points. This is a clear sign of the growing concern for the election outcome in France and its potential repercussions on the Eurozone.
What the experts say
Gregor Hirt, Global CIO Multi Asset at Allianz Global Investors, observes, as reported by Finanzaonline, that the correlation between the movements of the Btp-Bund and Oat-Bund spreads does not yet justify a strong positioning on Btp. According to Hirt, a potentially attractive level to build long-term positions could be represented by a Btp-Bund spread at 200 basis points.
Hirt also highlights the risk associated with a possible victory for Marine Le Pen’s far-right RN party, which could cause France’s debt-to-GDP ratio to jump to as high as 120%. This prospect has already had an impact on markets, with the euro coming under pressure and the Cac 40 losing more than 6% in the days following the election announcement.
Chris Iggo, CIO of Core Investments at AXA Im, noted that despite a widening of spreads on French corporate bonds by around 20-25 basis points, investors remain positive on fixed income markets, influenced by expectations of further cuts of interest rates by the ECB. Iggo, as reported by Milanofinanza, highlighted that election uncertainty may not immediately return spreads to pre-election levels and indicated that solid fundamentals continue to support issuers, especially in the financial, utilities and telecommunications sectors.
He also noted that the French stock market has underperformed other major indices since the election announcement. The 10-year BTP also continues to perform well, just above 4%.
In the meantime, US Treasury rates are slightly higher, while Australian and Japanese government bond yields are trending lower. These moves reflect different global economic and monetary dynamics, with the Federal Reserve forecasting just one rate cut this year, while other central banks may adopt different strategies in response to inflation data.
