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The France-Italy spread has flipped

Liberté, égalité, volatility

Eurozone sovereign bonds — unlike US, UK, or Japanese bonds — are not issued by governments that can, pretty much, make up new stuff and call it money.

As such, yield differences between bonds of the same tenor carry some information as to the market’s expectations for the likelihood of default.

Bond pedants will object that they also contain information about liquidity preference, relative levels of domestic financial repression, and a bunch of other things. And sure.

But still, it’s sort of interesting — in a Friday afternoon sort of way — to see that France has started to trade at a spread over *checks notes* Italy.

We noticed two-year BTPs trading through two-year OATs back in May. But frankly, two-year bonds can be a bit weird. Two-year BTPS traded through OATs briefly at the end of 2023 and the beginning of 2024. We just assumed that this was another one of those times and didn’t give the matter much thought.

But this week the spread of five-year BTPS over five-year OATS has flipped from positive to negative:

This looks like it’s a bigger deal. As far as we can see, it’s been over 20 years since France traded through Italy at the five-year tenor point. And it’s fair maybe to call 2005 the ‘before times’ — when European sovereign borrowers were seen as much of a muchness and sovereign spreads were pretty much meh.

Looking out to 10 and 30 years, Italian bonds still offer higher yields than their French bond counterparts. But they are increasingly seen as much of a muchness:

Has Meloni wowed the market into understanding Italy to be now devoid of credit risk? Nope. This is all about investors becoming incrementally less willing to take French risk without being more generously compensated. We think looking at French and Italian spreads over five-year swaps tells this story most cleanly:

If anyone needs reminding of the human and economic costs that can follow when the bond market cuts a government’s credit line (and the central bank won’t step in) they could do worse than read MainFT’s spectacular Big Read today on How Greece came back from the brink.

But before we get too carried away with ideas about the market pricing in an incipient collapse of the Fifth Republic, let’s reflect that we’re still a long way from Eurozone crisis levels. And long may they stay that way.

Altnet set to secure funding from investors and lenders to keep it afloat

CityFibre is closing in on a crucial £2.3bn refinancing designed to keep the UK’s third-biggest broadband network afloat.

The alternative network provider, or “altnet”, was in final talks on Friday about a deal that will see shareholders including Goldman Sachs and Abu Dhabi’s sovereign investor Mubadala inject a further £500mn of equity into the company, according to people familiar with the matter.

The group was also set to secure a further £960mn in debt from lenders including NatWest, ING and Société Générale, with the possibility of an additional £800mn in a so-called “accordion” facility, the people said. They added that the financing was set to be finalised on Monday.

The telecoms group, which was founded in 2011, has been racing to secure the extra funding since late last year, having warned in its 2023 results that it would run out of cash by mid-2025.

At the time CityFibre said there was a “material uncertainty” over its ability to continue without further external financing.

It is expected to use its stronger balance sheet to help consolidate weaker players within the altnet sector, with chief executive Greg Mesch claiming at a recent conference that the company had four deals ready to sign upon the refinancing’s completion.

The impending funding deal comes at a tougher time for the group of small companies hoping to challenge BT’s Openreach and Virgin Media O2, which have been squeezed by higher interest rates and increased competition. Cumulative losses in the altnet sector hit £1.3bn in 2023, according to consultancy Enders.

CityFibre is aiming to double its customer numbers by the end of the year, relying in large part on a landmark agreement signed with Sky last year as well as acquiring smaller companies in the market.

The Sky partnership, which also came into effect this week, gives the telecoms group the option of using CityFibre’s network for its 5.7mn broadband customers, enabling the altnet to broaden its subscriber base. Although CityFibre’s network has the potential to provide services to more than 4.3mn homes, it currently only has 518,000 customers.

In April, Sky met CityFibre’s lenders to reiterate its commitment to providing broadband services on the altnet’s network, as lenders including NatWest and ING sought reassurance before signing off on the refinancing deal. 

CityFibre told the Financial Times earlier this year it was in a “strong position”, citing adjusted earnings before interest, taxes, depreciation and amortisation of £5mn in 2024.

Karen Egan, head of telecoms at Enders Analysis said that CityFibre securing new funding was “absolutely central” to the future of the altnet sector.

She added it would give the company “the horsepower that they need to drive consolidation by acquiring smaller players in the sector and continue expanding their footprint”.

CityFibre declined to comment.

German government shelves vote on justices at the last minute after conservative rebellion over SPD pick

Germany’s ruling coalition has been plunged into its first major crisis since chancellor Friedrich Merz took office after his conservative MPs rebelled against a supreme court nominee backed by the Social Democrats.

Merz’s coalition was forced to shelve a vote on the appointment of three justices on Friday after it became clear the nominees would not get the required two-third majority in the Bundestag because of dissenters from the chancellor’s CDU/CSU group.

The last-minute kerfuffle underlines mounting tensions within the coalition, only two months after Merz took office on a promise to end the bickering that prematurely ended the coalition of previous chancellor Olaf Scholz.

It also shows how unhappiness among his conservative party base could prove problematic for Merz as he seeks to unleash hundreds of billions of euros of public borrowing to fund defence and infrastructure spending in an attempt to revive the Eurozone’s largest economy.

“This significantly affects the relationship of trust between the coalition partners,” Uwe Jun, a political scientist, said. “You have to be able to rely on agreements. And when you can no longer rely on agreements in a coalition, that shakes the trust.”

Frauke Brosius-Gersdorf’s supreme court nomination has proven contentious with some Christian Democrats © Britta Pedersen/picture-alliance/dpa/AP Images

On Friday — shortly before the vote and on the eve of parliamentary recess — Merz’s CDU/CSU group informed its SPD coalition partners it would not back the nomination of Frauke Brosius-Gersdorf, a law professor.

The official reason for the last minute decision was that allegations of possible plagiarism had emerged overnight and needed to be examined.

The author of the allegations, a blogger and self-described “plagiarism hunter”, on Thursday suggested similarities between footnotes to dissertations by Brosius-Gersdorf and her husband. On Friday he sought to distance himself from the way his work had been used by the CDU/CSU.

Brosius-Gersdorf’s nomination was already contentious even before the allegations, with some Christian Democrats criticising her views, notably on abortion, as too leftwing.

“This attempt at politicising the nomination of supreme court judges is unprecedented” in Germany, said Andrea Römmele, a political scientist at the Hertie School.

The SPD denounced what it called a “smear campaign”.

“I never imagined that we would see debates reminiscent of those on appointing justices to the US Supreme court,” Dirk Wiese, a senior SPD MP, said in parliament. “We have seen a smear campaign in recent days against a highly respected civil law teacher, a highly respected lawyer who is professionally beyond any doubt.”

The party co-led by vice-chancellor Lars Klingbeil now needs to decide whether to stand by its nominee, who could not be reached for comment.

“This day is a disaster for parliament,” said Britta Haßelmann, co-leader of the Green party in parliament.

The row is a reminder of the relative fragility of the coalition, which enjoys a razor-thin 13-seat majority in parliament.

Such vulnerability had also surfaced when Merz became the first would-be chancellor in Germany’s postwar history to fall short of the required absolute majority in his election in parliament. He succeeded on a second attempt.

Tensions also recently emerged within the coalition over a decision to delay electricity tax cuts for consumers.

CSU party leader Markus Söder criticised Klingbeil, who is also finance minister, for not delivering the cuts in his first budget — even though Merz had also backed the reductions, which would have cost about €5.4bn annually.

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