Morgan Stanley: The Bond Vigilantes Have Picked Their First Target, And It’s France

By Seth Carpenter, chief global economist at Morgan Stanley

Around the world, interest rates have been rising … real rates, nominal rates, sovereign yields, and private yields. The drivers include central banks, oil prices, economic growth, and surging debt issuance to pay for the AI build-out and fiscal deficits. The fiscal angle has been most acute recently, centered on French sovereign debt (OATs). At wider than 150bps, the 30yr OAT-Bund spread surpassed the 130bp mark reached in the euro area debt crisis a decade ago. The market is reacting to years of fiscal slippage combined with the current political uncertainty. And if the market sees a justification for the spread widening, the ECB likely will as well, slowing any monetary policy response to offset the moves.