Japanese Funds Target French Bonds Amid Political Uncertainty, Yield Spread Widens 200 Basis Points

As France's political trust vote approaches, Japanese funds are seizing the opportunity to invest in French bonds. The political uncertainty in France has led to a sell-off in the French bond market, which some Japanese institutions view as a window for asset allocation. The core reason for this is that since April, the yield spread between French 10-year government bonds and their German counterparts has reached a stage high.

One strategy manager from a Japanese asset management company stated, "As the yield spread between French and German bonds continues to widen, we are actively looking for opportunities to increase our holdings of French bonds. Before the trust vote results are announced, there is a possibility that all parties will reach a compromise." This statement comes as French Prime Minister François Fillon announced that a vote of confidence in the government's policy agenda would be held on September 8 to consolidate the ruling base.

In response to this news, the French bond market experienced significant volatility during the Asian trading session on Tuesday, with the price of French 10-year government bond futures falling to its lowest level since March. Previously, lawmakers had strongly opposed the government's proposed 440 billion euro (approximately 510 billion USD) fiscal austerity plan, while Fillon emphasized that this plan was key to preventing France's public finances from falling into crisis.

Data shows that after the announcement of the trust vote, the yield on French 10-year government bonds rose 9 basis points to 3.51% on Monday. Since the unexpected election last year resulted in a hung parliament and stalled fiscal reforms, French bonds have become the worst-performing government bonds in Europe.

One portfolio manager from a Japanese asset management company analyzed, "The current widening of the yield spread is an opportunity to enter the market. The trust vote is essentially a routine procedure under the hung parliament system, and market concerns about the government's budget and France's credit risk will not be immediately realized. Rating agencies also show no signs of taking substantive action."

For Japanese investors, the appeal of French bonds lies in their significantly higher yields compared to the domestic market. As of Tuesday, the yield on Japanese 10-year government bonds was 1.615%, while the yield on French bonds of the same maturity was nearly 200 basis points higher. Public data shows that France is the third-largest offshore bond market for Japanese investors, with investment volumes trailing only the United States and the Cayman Islands.

However, there are also dissenting voices in the market. One executive chief fund manager from a Japanese asset management company pointed out that the government's trust crisis would prompt Japanese investors holding French bonds to adjust their positions: "Political uncertainty is always a risk factor that the market dislikes."

This view is echoed by some international institutions, which suggest that political instability in France could have a ripple effect on European investors, especially in the context of the widening yield spread between France and Germany.

Global investors are closely monitoring the results of the trust vote on September 8 and its subsequent political developments. This struggle over fiscal reform could redefine the short-term risk preferences of the French and European bond markets.