Federated Hermes Limited: Concerns over European budget deficits
By Mitch Reznick, Group Head of Fixed Income for London, Federated Hermes Limited
When it comes to the recent widening of yields in France’s government bond market (OATs), former New York Yankee Yogi Berra’s famous quote is highly applicable: “It’s like déjà vu all over again.”
On Monday, France’s Prime Minister Bayrou triggered a government no-confidence vote in order to generate backing for a deficit-reducing budget. It is highly likely that the government will fail the no confidence vote, kicking off renewed political and budgetary uncertainties in France.
This took the market by surprise this week, as reflected in the violent move wider in the yields on French OATs. The spread between the 10-year German Bund and French OAT has jumped 16 basis points to 82 since Monday. This is the widest level since January. Once again, the market is reacting to concerns that one of the widest budget deficits in Europe will not reverse; the prospect of a wave of strikes and protests; and general economic disruption. Under these conditions it is very difficult to see how French risk-assets can outperform in the near-term. Yet the widening of OAT yields could open some interesting medium- and longer-term investment opportunities for solid credit profiles.