A recent sell-off in French government bonds has prompted major investors to seek opportunities among distressed Eurozone debt, including Italian government bonds and corporate credit, amid concerns that contagion fears may be overstated.
In October, France’s benchmark 10-year bond yield surged to nearly 5 percent—its highest level in almost 25 years—as investor apprehension grew over the sustainability of the country’s €3.5 trillion debt load. The borrowing cost premium, or spread, on French debt relative to 10-year German Bunds widened sharply, reaching 1.4 percentage points, an increase of approximately two-thirds since the beginning of the month. Similar spread expansions were also seen across other Eurozone debt markets, with Italy’s 10-year spread climbing above 1.1 percentage points.
Despite the broad-based sell-off, several large asset managers view the current market turmoil as an opportunity to “bottom fish” for undervalued bonds. They argue the situation differs significantly from the Eurozone debt crisis over a decade ago, pointing to stronger institutional support and greater market confidence today.
Alex Everett, a fund manager at Aberdeen Investments, noted that the ongoing volatility is not indicative of a systemic crisis akin to that of the early 2010s. He highlighted the firm’s recent purchases of Italian government bonds, betting on their potential to outperform German Bunds amid market adjustments.
Corporate credit markets have also experienced increased volatility. Option-adjusted spreads on European investment-grade corporate debt relative to government bonds widened from 0.8 percentage points in early September to 1 percentage point last Friday, before narrowing slightly to 0.95 points on Tuesday, based on an Ice BofA index. James Carter, co-head of fixed income at W1M, described recent market movements as exaggerated and reported that the firm was acquiring French corporate bonds, including those issued by insurer Axa and bank BNP Paribas.
However, a degree of caution persists among investors regarding French government debt. While some have re-entered French sovereign bonds, others remain hesitant to counter a persistent trend of underperformance in this segment.
Market reactions have fluctuated amid political developments in France. Yields fell on Tuesday after far-right presidential candidate Marine Le Pen pledged fiscal discipline during the campaign ahead of April’s presidential election. Yet yields quickly reversed course on Wednesday, pushed higher by rising oil prices and ongoing uncertainty about France’s fiscal trajectory.
Overall, investors appear to be weighing near-term risks against longer-term confidence in the Eurozone debt markets, with sizeable funds positioning to capitalize on perceived temporary dislocations rather than signaling a broader debt crisis.