ECB Meeting Pushes Bond Yields Lower

As the European Central Bank (ECB) prepares for its meeting on December 12, attention is centred on the prospect of a third rate cut amid slowing growth, which could further support European bonds that have already been rising in anticipation. Previously, in response to the post-COVID-19 recovery and soaring energy prices driven by the Russia-Ukraine conflict, the ECB had implemented significant rate hikes. However, since June 2024, its monetary policy has taken a more accommodative turn as inflationary pressures eased, and economic conditions stabilised. The second rate cut occurred in October, reducing the deposit rate to 3.25%.

French-German Yield Spread Widens

Despite this favourable environment, the yield spread between French and German government bonds is widening. On Tuesday, the yield on French 10-year OATs rose to 3.03%, while Germany's Bund stood at 2.19%. The resulting 84-basis-point spread marks the highest level since mid-2012, although it remains within ranges that do not yet signal an imminent debt crisis. Notably, the French spread has now surpassed Spain's and is equal to Greece's. However, it still lags behind Italy's spread of 126 basis points.

Political Risks and Market Reactions

Financial markets are reacting negatively to political risks in France. The French government's budget plans aim to reduce public spending from 6.1% of GDP in 2024 to 5% by the following year. This strategy, combined with the potential for government censure, adds further layers of uncertainty. As a result, the current political climate could continue to impact bond markets and spread dynamics in the region.

Fixed Income ETF Focus

Last week, German Bond ETFs gained 0.50% while French Bond ETFs increased by 0.41%. The largest increases are for long-term bonds. The Amundi Euro Government Bond 25+Y UCITS ETF (LMTH) and the iShares € Govt Bond 20yr Target Duration UCITS ETF (IS05) gained 3.74% and 3.18% over the week, respectively.

Here is a comparison of ETFs invested in Europe Fixed Income

Group Data:

Index Data:

Funds Specific Data:

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.