BlackRock warns that competition for capital in global bond markets is intensifying! France-Germany bond spread breaks through 150 basis points; US Treasuries and Latin American local-currency bonds gain favor.

Note that the BlackRock Investment Institute (BII) points out that the sharp selloff in French government bonds is a reminder that the intensifying competition for capital is subjecting borrowers to stricter scrutiny, especially in a global environment awash with high yields. Although global bond markets are under broad pressure, France has become the weak link: the government is trying to roll out a cost-cutting budget while also dealing with nationwide protests over the cost of living and conditions on school campuses. BlackRock strategists led by Wei Li wrote in a report, "The French government bond selloff shows that against the backdrop of a global rate reset, competition for capital is reshaping fixed income markets," and that "it is increasingly important to figure out what is pushing yields higher, and whether investors are being adequately compensated for the risks they are taking on." The spread between French and German 10-year government bond yieldsa closely watched risk indicatorbroke through 150 basis points on Tuesday, touching that level for the first time since October 5. The spread recently hit a peak of 159 basis points, the widest level since the region's sovereign debt crisis in 2011. Strategists wrote, "France shows how important it is to be picky about which bonds to hold," and "the widening of the spread over German government bonds shows that investors are still demanding extra compensation for France's fiscal and political risks." Public unrest intensifies, French bond risk premium rises Strategists said the euro area today is far better equipped to handle crises than it was 15 years ago. The European Central Bank has stronger tools, and the banking sector is far more robust than it was then. BII noted that although France's debt-to-GDP ratio has swollen to nearly 120%, the corresponding metric for the entire euro area has now returned to around 89%, the level seen in 2011. However, they added that ECB intervention is "not a given," and that "further volatility and spillover effects are still possible." Although indiscriminate selling could create opportunities in markets with better public finances such as Spain, BII remains neutral on euro-area government bonds. Opportunities outside Europe are also plentiful. According to BII data, more than 80% of bonds globally now yield above 4%, compared with only 6.3% five years ago. Strategists are particularly bullish on US Treasuriesthey had just upgraded US Treasuries last weekas well as emerging-market local-currency bonds, especially in Latin American markets. They also cut their underweight position in Japanese government bonds, believing that most of the expected yield adjustment has already been completed.