The Politics Premium Is Punishing Bonds From Paris to Tokyo

Group 1 - Bond holders are demanding higher premiums to hold the debt of developed-nation governments due to political turmoil in France and Japan, indicating that politics is becoming a more significant market driver than central bank policy [1][2] - The French bond-market risk gauge reached its highest levels this year following the resignation and reappointment of Prime Minister Sebastien Lecornu amid a budget impasse [2] - In Japan, longer-maturity bonds fell sharply after Sanae Takaichi's unexpected rise in the ruling party, raising concerns about increased government spending [2] Group 2 - Governments worldwide face a dilemma where investors seek fiscal consolidation, but austerity measures are politically contentious and can negatively impact electoral outcomes [3] - Geopolitical tensions, particularly between the US and China, are exacerbating pressures on economic growth, as highlighted by President Trump's threats of increased tariffs [3][4] - Political risk is expected to remain high over the next decade, as stated by Chris Iggo from AXA Investment Management [4] Group 3 - Despite political encroachments on markets, US Treasuries have maintained their appeal as a safe haven during periods of volatility, with the dollar recently experiencing its best week in nearly a year [5] - Real yields on bonds, adjusted for inflation, are reaching new highs, reflecting rising political risks and the increasing need for governments to issue more debt [6] - Long-end real yields are now significantly above potential growth rates in several top-rated countries, including Germany, Italy, France, and the UK [6] Group 4 - Investors are cautioned about a potentially adverse dynamic that could threaten debt sustainability, with expectations that the situation may worsen before achieving a new sustainable equilibrium [7]