City workers in the La Defense business district of Paris. A very small band of investors is starting to snap up French debt after three months of volatility turned off most funds.
A very small band of investors is starting to snap up French debt after three months of volatility turned off most funds. Jupiter Asset Management and hedge fund Mount Lucas Management are among those looking past the country’s recent political turmoil — it currently doesn’t even have a prime minister — and swelling pile of public debt, to buy its long-term government bonds. That’s a wager based on the view that a selloff has been overdone since surprise elections were called in June. “We do like France,” said Mark Nash, Jupiter Asset Management’s head of fixed-income alternatives, pointing to an excessive risk premium versus neighbour Germany that now makes the bonds “cheap.” He reckons the region’s interest-rate cuts will end up taking the sting out of its debt burden. The market is assigning a high level of risk to France, with this yield premium to haven German debt having soared in June to the highest since 2012, the time of the euro-area debt crisis. It’s still elevated after the election as divergent parties vie to form a government, while the country’s stocks are lagging peers. French President Emmanuel Macron has prolonged discussions this week on appointing a prime minister after rejecting Lucie Castets, the candidate representing the New Popular Front leftist alliance, which won the largest number of seats in the election but not enough to govern alone. Its pledges for vast public spending and higher taxes have spooked investors. For Nash, it’s his latest punt on an unloved section of the market, following multiple bets on Greece and then two-year US Treasuries last year. He just increased his long position on 30-year French debt last week, seeing the recent downturn in global economic data helping drive further European Central Bank rate cuts. He expects the French premium on this tenor to fall to 60 basis points, from over 100 now. “The debt credibility issue for France is a problem when you have an environment in which global real rates are rising and rising, which we had before,” he said. “France will be bailed out by the ECB cutting eventually.” Allianz Global Investors, one of Europe’s biggest funds, also sees near-term opportunity in French bonds. It expects the situation in parliament, where no one party is able to act alone, will mean no extreme fiscal policies can be implemented. Still, it’s not clear Macron can easily find a prime minister who would have the cross-party support that he said the NPF and Castets lacked to withstand no-confidence votes in parliament. Some members of the left-wing alliance have indicated they could agree to not censure a more centrist figure, on the condition there is a clear shift away from Macron’s pro-business policies. There is no official deadline for a decision, but there is growing urgency for a new government to get to work in order to present a budget at the end of September. That’s no bar for David Aspell, co-chief investment officer and partner at Mount Lucas Management, which purchased the bonds in the firm’s quant strategy. “The parliamentary things seem like they will work themselves out,” he said. Yet most of the market sees too much risk to make such a wager at the moment. More than 10 investment firms contacted by Bloomberg said they were not buying French bonds, including the likes of Vanguard Asset Management, Abrdn Plc and JPMorgan Asset Management. Even once a new premier is in place, they will be under pressure on the budget from all sides. Lawmakers from the NPF alliance and Marine Le Pen’s National Rally — the single party with the largest number of seats in the National Assembly — were elected on platforms to boost spending and undo some of Macron’s key pro-business measures of recent years, including his decision to raise the retirement age in 2023. “Budget discussions could create renewed tensions,” said Ales Koutny, head of international rates at Vanguard, which is using short positions on French bonds to hedge its long bets on Spanish and Greek debt. “We think the current spread is fair. We need some resolution regarding the budget and no increase in the deficit to make us reassess our view.” The EU has already reprimanded France for running a big deficit. In April the government forecast debt would hit 113.1% of annual economic output next year, up from 112.3% in 2024. That’s well above Spain and Portugal, traditionally considered more risky for bond investors. “We don’t own any French bonds. Should we?” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “What we find unattractive about French bonds are valuation, uncertainty over politics, but most importantly better opportunity elsewhere.” Some funds pointed to Spain as a better option. For those willing to bet on a recovery in France, the trajectory of Italy may offer a positive model. Perennially seen as risky, given inflated debt and fractured coalition politics, right-wing populist leader Giorgia Meloni’s government has pursued broad restraint since taking power in 2022. Now it’s seeking cost cuts to fill a hole in the budget. That’s slashed the spread between Italian and German 10-year bonds by about 30 basis points this year to near a two-year low. This is the kind of juice buyers of France are looking for. Prospects for the French-German spread look “attractive” for Mount Lucas Management’s Aspell.
