An Australian fund is once again buying French bonds, Goldman Sachs considers the rate difference between France and Germany "excessive": is the market pressure on French debt exaggerated?

This has not happened since 2002. On Wednesday October 21, France's 10-year borrowing rate crossed the symbolic threshold of 5% while a massive sale of bonds has been underway for several weeks. The trend is certainly observed throughout the world but it particularly weakens France, considered the weak link due to the pitiful state of its public finances.

This pressure on France is observed in particular through the surge in the spread, i.e. the rate difference with Germany, which was around 175 basis points a few days ago (161 currently), compared to 70 points last summer. But is the extent of this distrust towards France really justified? No, according to the Australian Retirement Trust (ART), the second largest Australian fund, which decided against the tide of other investors to buy French bonds, reports Bloomberg.

Exaggerated expectations ART's main portfolio manager, Jimmy Louca, explained that he began positioning himself on 10-year French securities in September, when the yield exceeded 4.5%. And he then intensified his purchases in October, despite growing concerns about political instability in France and the government's ability to pass a budget reducing the public deficit for 2027. Why such a bet?

Because “we believe that the market excessively anticipated two elements: the scale of the ECB’s rate hike cycle and the budgetary deterioration that should occur during this cycle,” explains Jimmy Louca to Bloomberg. Beyond concerns about the French budgetary situation, investors who anticipate rate increases from the ECB given the return of inflation are also effectively contributing to the rise in bond yields. The mechanism is as follows: hoping for better remuneration tomorrow with the rise in rates, these investors sell the securities they own today.

However, the more sales there are, the more bond prices fall because supply increases faster than demand. And as the price of a bond falls, its yield increases. For the ART, these expectations of rate increases are exaggerated because if the surge in energy prices has fueled inflation since the start of the conflict in the Middle East, it also penalizes growth which, in the long term, should slow down...

inflation and reduce bond yields. Since yields are inversely proportional to bond prices, the Australian fund is buying French debt today, counting on the fact that it will be able to resell its securities at a higher price in the future. Jimmy Louca also judges that the budgetary risk for France is overestimated by investors.

While he does not deny the country's difficulties, he emphasizes that the government as well as the National Rally, current favorite in the polls for the presidential election, are both committed to reducing the public deficit which should reach 5.4% of GDP this year. The portfolio manager also justifies his optimism for France by citing the recovery of European countries which were weakened by the sovereign debt crisis in the early 2010s. "Even if the path is more strewn with pitfalls and may take longer than short-term investors would like, it is important to note that Greece and Italy are now posting primary budget surpluses, something almost inconceivable at the time," he said. said.

Machine-translated from French