French bond bleeds out as Brent calls the shots

French bond bleeds out as Brent calls the shots

The French 10-year bond has stopped acting as a safe haven and started acting as a problem. While Spanish and German bonds held their ground, French yields kept climbing with an insistence that can no longer be explained by circumstances alone: the market is pricing in a country that spends more than it takes in and that, unlike others, has no central bank buying its debt. The result is a steepening curve and a government that will inherit the mess.

The immediate trigger is not in Paris. It is in the Strait of Hormuz. The oil price has become the thermometer of geopolitics and drags everything else along with it: bonds, stocks, currencies. When Brent rises, yields tighten; when it falls, they breathe. And in recent days Brent has done both within hours.

Brent as the conductor of the orchestra

The sudden drop in crude in a single afternoon was enough to save the IBEX and give Wall Street breathing room. Bonds, which had started the session with rising yields, recovered ground from mid-afternoon and returned to pre-scare levels. It was not a fundamentals move: it was a headlines move. The visit of Pakistan's army chief to Tehran carrying a message from Washington was enough for the market to price in an easing of tensions.

The problem is that this easing is not confirmed. Iran keeps the Strait of Hormuz as a pressure tool, and the conditions it has put on the table —an end to threats, withdrawal of forces from the Gulf, lifting of the blockade— do not look negotiable in the short term. Every ship attacked in the area is a reminder that the oil price depends not on supply and demand but on one country's political agenda.

The stagflation that is already here

The combination of expensive oil and weak growth has a name and has been settling in for some time. Today's inflation is not the demand-driven kind fought by raising rates: it is supply-side inflation, scarcity inflation, energy getting costlier for reasons beyond monetary policy. Raising rates in that scenario does not bring down the price of crude, but it does make debt more expensive and suffocates businesses and households.

The calculation doing the rounds in the rumor mills is uncomfortable: debt interest in France and the United States already eats up half of what their governments collect. Half. Interest alone. From that starting point, any rise in yields is not a financial anecdote: it is a transfer of income from the taxpayer to the bondholder.

Elections and market manipulation

The US elections in November loom over the whole analysis. Some argue that the American bond yield is being artificially contained so that it comes in below 5% on voting day, and that the brake will be released after that date. The thesis is not far-fetched: the Treasury has tools to modulate buying pressure, and the political calendar has always influenced debt management.

What is a fact is that the American bond started the session falling and ended it rising, and that the Nikkei erased more than 23.5 trillion yen —some 150,000 million dollars— in a single day of tech selling. Markets are not waiting for the ballot box: they are already pricing in the aftermath.

The Spanish bond and the umbrella mirage

The Spanish 10-year bond is approaching levels not seen for a long time, and it is doing so without the ECB's umbrella. During the previous crisis, the central bank bought peripheral debt without hesitation. Not anymore. Spanish debt faces the market without a safety net, and the spread against the German bond becomes the only reliable thermometer.

The comparison with Portugal and Greece, the former slow learners, is starting to be uncomfortable. If they are weathering it better, the question is not what they are doing right, but what we are doing wrong. And for now, the answer is not in the growth data.

The printing press as the last frontier

The temptation to return to zero rates and massive issuance of paper is on the table. The problem is that repeating the 2010 recipe with inflation already high and energy-driven does not contain price rises: it sends them spiraling. And with housing in short supply, any monetary stimulus translates into more expensive property, not more production.

The scenario that remains is the one nobody wants: keeping rates relatively high, accepting layoffs and bankruptcies of over-indebted companies, and hoping oil calms down on its own. There is no plan B that does not involve praying.

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With these spreads, the migration of capital toward peripheral debt should be massive. It remains marginal. Nobody can quite explain why.