France — Postponing a necessary adjustment
French Prime Minister Lecornu resigned less than a month into the job, catching markets by surprise. The OAT-Bund spread spiked nearly 6 basis points to recent highs but retraced later in the week as expectations for a new PM stabilised sentiment. We believe the government is merely postponing difficult decisions on fiscal reform, with President Macron attempting to form a coalition to avoid early elections. However, the underlying fiscal challenges remain unaddressed.
Japan — New LDP leader, old problems
Takaichi’s unexpected victory in the LDP leadership race surprised markets, prompting a 5% rally in the Nikkei, a sell-off in long-end JGBs, and a weaker yen as investors priced in looser fiscal policy. However, Friday’s headlines about the collapse of the LDP-Komeito coalition dealt a blow to Takaichi’s standing, injecting new political uncertainty. We remain negative on Japanese duration as fiscal dominance continues to prevail.
Algebris Investments’ Global Credit Team
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