Investing.com — Rising French government bond spreads are raising concerns about the resilience of European equities, as political uncertainty and higher global borrowing costs add to pressure on the country’s public finances.
Bank of America sees risks from a further increase in yields but expects limited additional widening in French bond spreads, prompting it to upgrade French equities despite maintaining a bearish outlook on the broader European market.
The spread between French and German 10-year government bond yields has widened to 140 basis points, its highest level since the euro zone debt crisis of 2011-12, according to BofA. The increase reflects both rising global bond yields and political uncertainty in France, adding to financing pressures for vulnerable borrowers.
BofA’s rates strategists expect the spread, known as the OAT-Bund spread, to remain within a range of 100 to 150 basis points. However, a swift move towards the upper end of that range would increase the likelihood of policy backstops being activated, including potential European Central Bank intervention.
French fiscal risks versus broader market pressures
European equities have so far remained largely resilient to concerns about France’s fiscal position. The STOXX 600 has fallen around 5% from its record high in August, but BofA attributes most of the decline to a 50-basis-point rise in U.S. 10-year real bond yields rather than French fiscal risks.
The bank said the equity risk premium remains near a 20-year low, supported by strong global economic growth and continued upward revisions to earnings estimates. However, it remains negative on European equities outright, forecasting a further 7% decline in the STOXX 600 to 580 by the second quarter of 2027.
That cautious outlook reflects concerns about the sustainability of the artificial intelligence capital expenditure boom, which BofA sees as a potential risk to market expectations and corporate earnings.
The bank has nevertheless become less negative on European equities relative to global stocks, raising its stance from underweight to neutral. Its macroeconomic projections suggest limited further near-term downside after Europe’s recent underperformance.
Why BofA is turning more positive on French stocks
BofA upgraded French equities from marketweight to overweight, citing their sharp underperformance and its rates strategists’ expectation that the OAT-Bund spread has limited room to widen further.
The bank’s more constructive stance on France therefore rests partly on the view that much of the fiscal risk has already been reflected in valuations, while the potential for policy backstops could limit additional pressure on sovereign debt.