Selloff spills into risk
Global rates markets continued to display extraordinary volatility last week, led by French bond markets. The selloff became so extreme when Bund/OAT widened above 150 basis points that this finally spilled over into risk assets, widening credit spreads and pressuring equities. The narrative for the ECB shifted too, as markets questioned which steps the ECB can take to stop the panic. Consensus sees interventionist bond market policies like TPI still far away and instead markets reduced ECB hike pricing by 20 basis points throughout the week. Notably, German bonds returned to their safe haven status, even bull flattening towards Friday as investors extended duration.
No sign of stability
French bond markets had a rough week, with 10-year OATs widening at some point more than 50 basis points, above 150 basis point intraday versus Germany on little actionable newsflow. In politics, the budget process was kicked off where the deficit target of 5% for 2027 was maintained, however this is likely to melt higher towards 5.2-5.4% in the negotiation process. The French treasury announced a 340bn issuance target for 2027 and auctioned 12bn of government bonds mid-week as scheduled, adding further fuel to disorderly bond markets. There are no immediate catalysts which can resolve the situation, so the market is waiting for commentary from the ECB or French political developments to signal stability.
No urgency for the Fed
Friday’s job report surprised to the downside, as the US economy added only 29k jobs versus 90k expected. Private jobs rose by 46k while government jobs continued to fall at -17k. Unemployment rose to 4.2%, 0.1% higher than expected but still overall low. The jobs market remains no source of inflation and this report reduces immediate pressure on the Fed to continue hikes. Comments by Williams earlier last week pointed to patience within the committee, and Friday closed with only 25% chance of a hike in October priced.
Flavio overtakes, Markets Samba
Flavio Bolsonaro won the first round of the presidential election, securing a 2% lead over Lula and outperforming polls. The electoral math now appears to strongly favour Flavio ahead of the runoff scheduled for 25 October. Voting patterns suggest that support is consolidating around Jair Bolsonaro’s son, while a Lula comeback would require a combination of outcomes that currently appears unlikely. Right-leaning parties also performed strongly, particularly in the Senate and at the state level. This further confirms the broader rightward shift in voting preferences across Latin America, where security concerns and demand for political change remain key priorities for voters. The result is materially more market friendly than expected and is likely to trigger a positive repricing of Brazilian assets. If Flavio is elected in the second round, attention will shift to his ability to deliver fiscal consolidation, manage tensions with the Supreme Court, and address the pardoning of his father, former President Jair Bolsonaro.
Algebris Investments’ Global Credit Team
For more information about Algebris and its products, or to be added to our distribution lists, please contact Investor Relations at algebrisIR@algebris.com. Visit Algebris Insights for past commentaries.
Any opinion expressed is that of Algebris, is not a statement of fact, is subject to change and does not constitute investment advice.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris Investments, its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
© Algebris Investments. Algebris Investments is the trading name for the Algebris Group.
