France Is Losing Its Buyers

Bloomberg (Oct 2): Sumitomo Mitsui DS Asset Management's Shinji Kunibe said funds in his global fixed income group sold their entire holdings of French government bonds over concerns about France's fiscal situation, moving into German Bunds and short term Japanese government bonds. Bloomberg also reported that Crédit Agricole Assurances, a French insurer, is diversifying away from French sovereign debt. BofA's European fund manager survey now ranks France as the least preferred market. Candriam's CIO said investors now doubt not only France's ability to repay but its willingness. Evercore ISI called France an epicenter of global bond market stress. France's debt agency plans a record €340 billion of medium and long term issuance next year, net of buybacks, about 10% more than this year. The French 10 year spread over Germany reached 150 to 152bp on Oct 2, levels last seen in 2011, and the French 10 year yield is around its highest since 2002. The French 2 year rose 13.8bp in a session. French 5 year CDS hit its highest since 2013. Spillover: the Italian 2 year spread over Germany almost doubled on Oct 1, its biggest daily jump since 2020 on a closing basis, and the euro fell to its lowest in more than a year against the dollar.

The global long bond selloff has two parts. In the US, yields are rising alongside the dollar, which reads as growth, inflation and fiscal tolerance. In France it is credit: investors repricing the risk of lending to the government itself. When the 2 year moves 13.8bp in a day, that is not term premium. That is doubt about the borrower. What matters is who is leaving. Foreign selling can be dismissed as nervous money. A French insurer reducing exposure to French debt is harder to dismiss. And the exits are happening into rising supply, a record €340 billion next year, which means the market needs more buyers at the exact moment it is losing them. This is not the yen carry trade unwinding, despite how it is being sold online. The Sumitomo proceeds mostly stayed in euros, in German Bunds. It is a credit call inside Europe. Contagion has a specific sequence, and one step has happened. Italy's 2 year spread moving that fast says the market is starting to ask which other sovereign is next. The Italian 10 year has not followed yet. Meanwhile the ECB is still tightening, and a central bank raising rates into a sovereign spread blowout was 2011's mechanism. The ECB's backstop for this situation requires fiscal compliance, which is exactly what France is struggling to show. For US bonds, the transmission runs through global term premium, not banks. Every Western long bond market demanding more compensation at once makes it harder for any one of them to rally on its own.