BlackRock warns of increased competition for capital in the global bond market! Interest spreads on French bonds and German bonds exceeded 150 basis points, and US bonds and Latin American local currency bonds were favored

The Zhitong Finance App notes that BlackRock Investment Research Institute (BII) pointed out that the drastic sell-off of French treasury bonds is a reminder that the intensifying battle for capital is causing borrowers to face stricter scrutiny, especially in an environment where high yields are rampant around the world.

Despite widespread pressure on global bond markets, France has become a weak link: the government is trying to launch a cost-cutting budget while also dealing with nationwide protests over living costs and school conditions.

BlackRock strategists, led by Wei Li, wrote in the report, “The sell-off in French treasury bonds shows that capital competition is reshaping the fixed income market in the context of global interest rate resets.” Currently, “it is increasingly important to understand what is driving up yields and whether investors have received sufficient compensation for the risks they have taken.”

The 10-year yield spread between France and Germany — a much-watched risk indicator — broke 150 basis points on Tuesday, hitting that level for the first time since October 5. The spread recently peaked at 159 basis points, the widest level since the region's sovereign debt crisis in 2011.

The strategist wrote, “France shows how important it is to be picky about securities,” and “the widening spread on German treasury bonds shows that investors are still seeking additional compensation for France's financial and political risks.”

French bond risk premium rises as public unrest intensifies

The strategist said that the Eurozone's ability to cope with the crisis is much better today than it was 15 years ago. The ECB has more powerful tools, and the banking sector is far more stable than it was back then. According to BII, although France's debt as a share of GDP has swelled to nearly 120%, the corresponding indicator for the entire Eurozone has now returned to around 89% in 2011.

However, they added that the ECB's intervention was “not inevitable” and that “further fluctuations and spillover effects are still likely to occur.” Although indiscriminate sell-offs may create opportunities in markets with better public finances, such as Spain, BII still has a neutral view of Eurozone treasury bonds.

Opportunities outside of Europe are also plentiful. According to BII data, more than 80% of global bonds now yield more than 4%, compared to only 6.3% five years ago.

Strategists are particularly optimistic about US Treasury bonds — they just upgraded their US debt ratings last week — and local currency bonds in emerging markets, particularly Latin America. They have also cut low-allocation positions on Japanese treasury bonds, believing that most of the expected yield adjustments have been completed.