French government debt has hit the highest level on record, with the 10-year bonds edging above global financial crisis levels to 4.56%.
The 30-year reached 5.1% as France’s public spending continues on an unsustainable path, exacerbated by high oil prices and slow economic growth.
David Roberts (pictured), head of fixed income at Nedgroup Investments, sees the assets as something to steer clear of.
Even with French government bonds now paying 1% more annually than German for the 10-year, that is not sufficient, in his view.
”We own no French government debt,” he said. “On some measures that makes it our biggest portfolio underweight.
”The additional premium is good, but not enough to tempt us. We prefer solid, global investment grade corporate bonds with similar yields to French OAT.
”The fragmentation of French politics makes budget resolution difficult in the medium term. Until we see some improvement, potentially a concerted attempt to address necessary pension reforms, it is unlikely we will invest.”
Roberts noted that if oil falls by 10-20%, it is likely that French and Italian government bonds will do better than German counterparts, but not enough to make them a better investment for his funds.
“As above, we’d rather be overweight IG names, which should see a generic benefit. Or indeed just remain long German debt, which should remain directionally correlated to France and Italy in an oil related bond rebound.”
