European bonds stabilized after a week of dramatic swings, with falling oil prices bringing relief from budget worries and abrupt shifts in hedge-fund positioning that whipsawed yields.
French bonds headed for their first weekly gain in six and Italian notes for their first in nine as yields across the region fell and Brent crude retreated toward $100 a barrel. The comparative calm follows moves that saw French 10-year yields swing as much as 16 basis points lower and 18 basis points higher on successive days earlier this week.
Confidence is creeping back into European debt markets as a lull in new developments in France and assurances from European Central Bank President Christine Lagarde buoy investor appetite. Crude oil retreated after President Donald Trump said he’ll hold off on new strikes on Iran before November’s midterm elections.
“A sense of normality is returning, with correlations establishing their usual patterns and oil lifting all boats,” said Christoph Rieger, head of rates and credit research at Commerzbank AG. He noted that moves in German and French bonds were once again more closely aligned after last week’s divergence .
The extra yield investors demand to hold French bonds rather than safer German notes narrowed three basis points to 137 basis points.
Expectations for European Central Bank rate increases also declined. Swaps implied 72 basis points of interest-rate hikes by the end of next year, down from 75 basis points on Thursday.
Lagarde told euro-area finance ministers that officials are paying attention to financial markets and have the tools to counter unwarranted, disorderly moves.
Still, investors remain cautious, demanding · the most compensation to own French bonds over Italian ones since the founding of the euro.
Buyer Strike
Hedge funds are likely to use any rally to add to short positions, while longer-term investors are waiting for more stability before returning, according to Mohit Kumar, chief economist and strategist for Europe at Jefferies.
French yields would need to blow out to 200 basis points above those of Germany before the ECB would take steps beyond verbal interventions, he said.
“We remain short France,” Kumar said. “We don’t think that we have a sovereign crisis or that any European country would need to restructure. Our concern is more that we see a buyer strike.”
Earlier Friday, the French Debt Agency announced sales of up to €12 billion ($13.4 billion) of medium-term bonds to be held on Thursday next week.
“Bond markets are clearly focused on France today,” said Kevin Thozet, member of the investment committee at Carmignac, in an interview with Bloomberg TV. “Tomorrow it could be Japan, the UK or US — because all of them are sharing the same symptoms.”