What French fiscal woes might mean for gilts
TLT•Capital Economics economist Joe Maher said French fiscal stress is unlikely to spread to UK gilts, which have recently moved more in line with German Bunds. Any boost to gilts may be small and limited, he said.
1. Limited spillover risk
Capital Economics does not expect French bond stress to push up UK gilt yields, citing gilts’ recent alignment with German Bunds rather than French bonds. Joe Maher said euro-zone fiscal stress has not typically put upward pressure on gilt yields and that the French and UK issues have domestic roots.
2. Possible safe-haven support
Maher said French fiscal stress could put some downward pressure on gilt yields, as investors seek safety and lower UK interest-rate expectations in response to weaker economic activity. He expects any impact to be limited, with a low risk of the 2010-12 euro-zone debt crisis repeating and gilts in a weaker safe-haven position now.
