After years of central-bank backstops, the Eurozone bond market has reportedly started to notice the reappearance of old fault lines from the sovereign debt crisis. Political risk is increasing across Europe, coinciding with a global bond market sell-off.
France is now considered the weakest link, with the spread between French and German 10-year government bonds widening to approximately 150 basis points. This level has not been observed since the sovereign debt crisis. France intends to issue a record €340bn in medium and long-term government bonds next year.
Germany's debt agency also anticipates its borrowing will exceed the record planned for 2026. Both France and Germany have right-wing parties leading in polls and gaining greater electoral representation. Spain is set to hold an early general election on 29th November, a decision made by Socialist Prime Minister Pedro Sanchez.
The European Central Bank (ECB) created the Transmission Protection Instrument (TPI) in July 2022, designed to ensure even monetary policy transmission. The TPI allows the ECB to purchase a country's government bonds if markets move in an "unwarranted" and "disorderly" manner, though its activation criteria involve complex judgement calls by central bankers.