Global Credit Bullets | Monday, 26 October 2026

Another week of volatility and pressure on French spreads, which have touched 175bp. France’s fiscal position is becoming increasingly difficult to ignore (as we argued in our latest piece À bout de souffle: What’s up with France) : the budget deficit reached approximately 5.1% of GDP in 2025, while public debt rose to 115.6% of GDP and is projected to exceed 120% by 2027. Even at a 175bp spread, France’s implied rating is around BBB, almost four notches below its actual sovereign rating. In 2022, the ECB introduced the Transmission Protection Instrument (TPI) when Italy’s spread was around 200bp, while the market was guided to view a level closer to 250bp as a potential threshold for intervention. The case for TPI is strong, not to shield France from the consequences of fiscal deterioration, but to prevent disorderly market dynamics and contain the risk of contagion and broader spillovers across euro-area sovereign markets.

A pivotal election for the future of the Middle East is due to take place in Israel this week. The contest is expected to be exceptionally close, with Netanyahu’s coalition weakened and Arab parties potentially emerging as decisive kingmakers. The key question is whether the Netanyahu era is coming to an end, and what a change in government would imply for the conflict with Iran. The most likely outcome remains prolonged political deadlock, as current polling does not suggest that either bloc will secure a stable majority. If no coalition can be formed, Netanyahu would likely remain at the head of a transitional government, although an opposition minority government is also possible. A clear victory for either side cannot be ruled out, but both outcomes are considered unlikely.

Although economic activity remains relatively resilient in both Europe and the United States, tighter financial conditions are reducing the pressure on central banks to continue raising rates. German Bunds and US Treasuries acted as safe havens for market participants last week. Should peripheral spreads widen further, particularly as a result of pressure on French bonds, the ECB’s first response would likely be to pause its tightening cycle. In the United States, concerns about excessive indebtedness associated with the AI capex cycle are also increasing, while the market now largely expects the Fed to remain on hold in October. Attention is therefore likely to shift to the December meeting as the next potential opportunity for a rate hike. Against this backdrop, we continue to prefer duration exposure over high-yield spreads and broader risk assets.

President Lula defeated Flávio Bolsonaro in a surprise comeback, securing a fourth term in office. The result caught markets off guard, as pollsters failed to capture the shift among disillusioned voters who ultimately swung in favour of the incumbent president. Right-leaning parties retain a significant share of seats in Congress, making coordination between the executive and legislative branches challenging. A sharp depreciation of the Brazilian real, combined with higher for longer interest rates, is likely to weigh on growth and worsen the country’s debt trajectory. A fiscal adjustment will therefore be necessary, although markets will closely monitor its scale and timing. Additional spending commitments could further weaken an already fragile fiscal position.

Algebris Investments’ Global Credit Team