Bond investors are looking for a tough price in Europe’s three biggest economies, which are struggling with credibility as the conflict in Iran forces governments to return to borrowing.
“Britain, Italy and France are now the countries where they spread to what we would call the core countries – such as US and German government bonds – which have been growing when there have been concerns about inflation and how successfully these sovereigns are playing to get out of it,” said Craig Inches, head of rates and currencies at Royal London Asset Management.
Collectively named the ‘BIFs’ – a nod to the so-called ‘PIIGS’ (Portugal, Ireland, Italy and Spain), the problem children of the 2011 European sovereign debt crisis – Britain, Italy and France each face their own set of unique challenges.
While the 2011 euro crisis focused on solvency issues, governments in London, Rome and Paris are now facing a credibility challenge – and investors are increasingly lumping them together as new forms of financial misconduct.
It is productive 10 years oldwhich is the UK government borrowing rate, stood at 4.865% on Tuesday, while the yield in France 10 years of OAT it was 3.6388%, as in Italy 10 year bonds were changed to -3.7693 %.
By comparison, the yield in the US 10-Year Treasury was 4.2876%, while in Germany, Fund for 10 years yield up to 2.999%. A similar theme appears throughout the growth curve.
“If you look at the three nations, independently they all have their own problems,” Inches told CNBC’s “Squawk Box Europe” on Tuesday.
After the 2024 elections, France was left with a hung parliament. It went from difficulty to difficulty, when the government made decisions and efforts to change the structures became more restrictive.
Italy, by contrast, has “the most stable government it has had in years” under Gioriga Meloni, Inches said. “But they have a very high debt-to-GDP ratio, so they probably can’t service their debt, and their deficit is increasing.”
10 year UK Gilt.
The UK, on the other hand, has the lowest debt-to-GDP ratio in the region, and a Labor government with the largest majority in parliament. But Keir Starmer’s government faces a credibility problem with lenders, Inches said.
“A large part of the debt that the UK raises goes to the cost of paying debts and the welfare state,” he said, adding that the recent “political scandals” are causing concern for investors. “When people borrow in the UK there are concerns about where their money is being spent.”
The war in the Middle East has fueled short-term debt amid fears of a deflationary shock. But Inches said ongoing structural pressures in BIF countries will also push up long-term yields.
French 10-year bonds.
““Ultimately, you would expect to see the impact of demand erosion in the future and you would expect to see long-dated bonds stay where they are or start to decline in yield as markets price in lower interest rates going forward,” Inches said.
“But we’re not seeing that now – we’re actually seeing higher yields on long-term bonds.”
Countries are trying to deal with this issue by effectively reducing the maturities of debt issuance, and reducing the amount of long-term government debt in an effort to reduce long-term costs. However, the premium paid on borrowing costs by BIF countries remains high.
“If the economy really can get out of this, or eventually can get out of this, then the future may need to be high yield,” he said. “Investors want a high premia to lend to these masters for a long time.”
Italy’s 10-year bonds.
