BofA The European Credit Strategist OATflows and outbreaks 2026 10 09

The European Credit Strategist OATflows and outbreaks

Hokey Cokey in the bond market 09 October 2026

Wider French and Italian govie spreads this week, and all-time highs in 30yr Treasury Credit Strategy yields, show that the bond market is still struggling amid headwinds of higher energy Europe prices, Fed uncertainty and a global central bank hiking cycle. No rollover as yet in: 1) US Barnaby Martin hard data, 2) global forward EPS estimates, and 3) hyperscaler capex expectations, Credit Strategist MLI (UK) suggest that rate hikes are not yet “biting”. But as soon as they do, it would likely signal the peak in rates vol, in our view, and be the green light for credit longs again. Ioannis Angelakis Rates “sensitives”: starting to look oversold in credit Credit Derivatives Strategist MLI (UK) Where things are looking interesting already, in our view, is with rates sensitive sectors: utilities, financials, real estate. In credit, they have underperformed the market by as Mohit Agarwalla Credit Strategist much as in 2022. This seems excessive, given our view that the ECB hiking cycle will be MLI (UK) much tamer than in 2022. Today, the European inflation shock is predominantly a supply-driven one. In 2022, the problems were also a demand-driven one, requiring many more ECB hikes. With France teetering, the verbal ECB pushback on hike pricing is getting louder. If it continues, expect these sectors to start outperforming across credit.

Sovereign crises and credit: what are the signs? At the peak of the Euro crisis in 2011, IG spreads stood at 330bp, far higher than where they are today. What exacerbated the sell-off 15yrs ago was the linkages (the “nexus”) between sovereigns, banks and corporates. Banks held their own government debt, and corporates’ financing was geared more to loans than bonds. When bank spreads started to trade at multiples of corporate spreads in 2011, the market began to question whether the flow of credit to firms would dry up. As such, almost 70% of issuer credit curves inverted. Today, there are reasons for optimism amid the French saga, as firms’ reliance on loan financing is less. The good news today is that bank spreads still trade broadly on top of corporate spreads, hence very few issuer credit curves are inverting.

Negative spreads – it’s going global Corporate bonds with negative spreads to their sovereigns are now appearing almost everywhere. In Europe, it’s not just a France phenomenon: negative spread bonds are to be found in Italy, Spain and the UK too. Emerging markets have plenty as well. Firms can better control their balance sheets and debt growth, compared to sovereigns − where angry voters demand more spending. Corporates’ big cash pile is also providing a surprising boost to their cashflows as rates rise. While net interest payments are going up for sovereigns today, we find that they are going down for companies (charts 15/16).

Till debt do us part Bond market wobbles are usually a sign of too much debt. Four eye-catching stats on French debt: 1) France sovereign debt/GDP is unchanged since the post-Covid peak, 2) France hasn’t had a primary budget surplus since 1974, 3) France’s private non- financial debt/GDP is much higher than in the US, and 4) the median net income of French retirees is almost as high as the median net income of French workers.

Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in relevant markets and the financial resources to absorb any losses arising from applying these ideas or strategies. BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 8 to 10.

OAT so lonely Hokey Cokey in the bond market…:

• 10yr French government bond spreads gapped 15bp tighter on Tuesday on the back of Le Pen’s shadow budget (deficit below 3% by 2030), but are now back at…