Bond vigilantes upend French debt markets: Credit Weekly

Bond vigilantes upend French debt markets: Credit Weekly

2024-12-01 01:52:38 :

(Bloomberg) — Borrowing costs for some of France’s biggest companies are now lower than those of the sovereign, as credit traders worry a fiscal plan could topple the government.

Bonds issued by heavyweights such as luxury fashion group LVMH Moët Hennessy Louis Vuitton SE, aircraft maker Airbus SE and industrial gas company Air Liquide SA have lower yields than government bonds, data compiled by Bloomberg show.

The shift highlights how multinational companies that can generate revenue globally can escape concerns about political risk at home. In France, Prime Minister Michel Barnier’s efforts to curb a widening budget deficit could lead to his ouster, raising the country’s sovereign bond risk to levels last seen during the euro zone debt crisis.

“In Europe, what worries us is definitely France,” Ella Hoxha, head of fixed income at Newton Investment Management, said at a Bloomberg Intelligence conference on Thursday. “It’s rare in the market to see the dislocations we saw over the summer, but now we’ve re-established at higher levels.” “It doesn’t feel like things are going to be any better next year.”

Traders are more relaxed about multinational groups because their reliance on exports means their borrowing costs are not as severely affected as governments. In the case of Air Liquide, its domestic revenue last year accounted for only about 12% of its revenue, according to data compiled by Bloomberg. For LVMH, the maker of Fendi handbags and Krug champagne, it’s about 8%.

“The widening of oats spreads appears to be viewed as a unique and temporary issue,” Goldman credit strategists including Lotfi Karoui wrote in a note to clients this week, referring to French government debt. , rather than raising concerns about contagion, “escalating fiscal concerns are a greater risk to market sentiment than weaker growth.”

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Trading in blue-chip bonds, which yield below sovereign levels, typically occurs during periods of heightened political concern. In 2018, when populist leaders set budget targets that threatened the country’s financial stability, some Italian companies similarly traded at lower yields than the country’s government bonds. Government debt is also more liquid and therefore easier to sell short, pushing its yields higher.

This has practical implications for investors. The more ground government bonds lose, the more overvalued corporate bonds appear. S&P Global Ratings and Fitch Ratings still give France a AA- credit score, which is higher than about 95% of the 447 billion euro ($472 billion) French corporate bond market, according to Bloomberg indices.

However, due to the Eurogroup, French debt is generally not a safe reference for corporate borrowing. This role is usually played by German Bunds, regardless of the borrower’s residence in the region. Spreads to the benchmark remain positive, reducing the chances of a shift from corporate credit to government debt.

French government bonds “are not German Bunds or U.S. Treasuries. For corporate bonds, they are more of a soft valuation frontier than a hard valuation frontier,” said Marco Stoeckle, head of credit strategy at Commerzbank. ”

–With help from Dan Wilchins.

More stories like this can be found at Bloomberg.com

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