The French debt selloff could slow ECB hikes
TLT•Citi said the sharp selloff in French debt could lead the European Central Bank to hold rates in October, despite market pricing putting a hike at roughly a coin toss. The spread between German and French 10-year yields reached 111 basis points.
1. French debt pressure
The spread between German and French 10-year yields rose to 111 basis points after moving above 100 basis points last week. Citi said French bonds have been more sensitive to ECB rate expectations than Italian bonds since August, suggesting markets are focusing on the implications of higher rates for French debt servicing.
2. ECB policy implications
Citi said a continued French debt selloff could increase the possibility of the ECB using its Transmission Protection Instrument, which allows it to buy bonds from a euro zone country facing a disorderly and unwarranted tightening of financing conditions. Citi said the ECB may take a moderate approach to rate hikes and is unlikely to deliver back-to-back hikes in October.
