Eurozone Debt Crisis Spreads Beyond France

European bond markets are showing signs of broader contagion following the French budget presentation. The initial relief was short-lived, and spreads have widened to almost 140bp, with the 10y OAT/Bund spread reaching this level already.

This is particularly concerning for other highly indebted countries, such as Italy and Greece, where spreads have widened even more than France's, with a 15bp widening over German Bunds in the 10y. This broader risk-off has accelerated the Bund outperformance versus swaps, demonstrating that Bunds still hold their safe-haven status.

The increased risk aversion is also reducing market expectations for European Central Bank rate hikes, from as many as four hikes over the next 12 months to at most three with around 70bp of tightening discounted through next September. This reduction in tightening needs is in line with ECB President Christine Lagarde's argument that elevated longer-dated yields already do some of the monetary tightening.

The increased likelihood of an intervention by the ECB in bond markets is also worth noting, as the broader risk-off makes this more probable at the margin.