Turbulence in the French bond market has spilled over into the eurozone, but it has unexpectedly created a group of contrarian buyers. Several large asset management companies have seized the moment to step into Italian government bonds and European corporate bonds that were affected, betting that the market has overpriced concerns about systemic risks in the eurozone.

This month, the yield on France's 10-year government bond surged to its highest level in nearly a quarter of a century, approaching 5%, while its spread over German government bonds widened by about two-thirds from the start of the month to 1.4 percentage points. Government bond spreads in other eurozone countries such as Italy also widened in tandem, with Italy's spread briefly exceeding 1.1 percentage points.

However, several large asset management companies believe the risk of a systemic eurozone collapse triggered by this round of selling has been overestimated by the market, and that the current situation is fundamentally different from the European debt crisis more than a decade ago. This judgment has prompted some institutions to actively add positions amid market panic, seeking out "mispriced" assets.

Institutions add positions against the trend, with Italian government bonds and high-rated corporate debt in focus

Aberdeen Investments fund manager Alex Everett made it clear that he has established a new position betting on Italian government bonds outperforming German government bonds. He pointed out:

"This is not a replay of the early 2010s. Despite the recent surge in market volatility, the European government bond market today has far more solid institutional support and market confidence than it did back then."

James Carter, co-head of fixed income at investment firm W1M, said the company views recent market volatility as an overshoot and has been "buying the dip" in French corporate bonds, with purchases including bonds issued by insurer Axa and BNP Paribas. "We believe market moves in recent days have clearly been excessive."

Ninety One Fund Management, meanwhile, increased its European credit exposure through high-yield bond indices. Its portfolio manager Jason Borbora-Sheen said the company prefers to avoid French sovereign debt itself and instead position in other assets that are "affected by French government bond volatility but have very low actual exposure to French sovereign risk."

James Ringer, global fixed income fund manager at Schroders, also said the company had previously held underweight positions in Italian and Spanish government bonds. As prices of the relevant bonds fell and their value improved, it has begun reducing that underweight while increasing allocations to European investment-grade credit.

Corporate bond spreads widen in tandem, providing a buying window

This round of turmoil has not only hit the sovereign bond market; European corporate bonds have also been noticeably affected. According to ICE BofA indices, the option-adjusted spread on European investment-grade credit relative to government bonds widened from 0.8 percentage points in early September to 1 percentage point last Friday, before narrowing slightly to 0.95 percentage points on Tuesday.

Some institutions view this spread widening as a buying opportunity, believing that high-quality corporate bonds have been "collateral damage" from French political risk, that their fundamentals have not materially deteriorated, and that current pricing offers room for correction.

French risks have not yet cleared, institutions remain cautious on sovereign debt

Although dip-buying sentiment is rising, most institutions remain cautious about French government bonds themselves. French government bond yields briefly fell on Tuesday after far-right presidential election frontrunner Marine Le Pen made a fiscal discipline pledge, but rebounded on Wednesday amid rising oil prices and persistent market doubts about the direction of France's public finances. With several months still to go before next April's presidential election, France's fiscal outlook remains full of uncertainty.

Jason Borbora-Sheen made it clear that the company "lacks confidence in directly adding French sovereign debt before the 2027 election"; James Ringer also acknowledged:

"France's problems are far from resolved, so we are focusing on other sovereign bonds and asset classes with more solid fundamentals."

The ECB has tools, but has clearly drawn boundaries

Another source of confidence for institutional investors comes from the European Central Bank. Multiple investors said the market intervention tools the ECB has accumulated over the years, along with its tough rhetoric in defense of the euro, make the current situation very different from the 2012 crisis.

However, the governor of the Bank of France made it clear on Wednesday that there is currently no need for ECB intervention, stressing that the ECB "is not here to handle national budget problems." One trader also said the market is "somewhat overly excited" about the necessity of ECB intervention. Multiple asset managers believe that the mere existence of the ECB as a "last line of defense" is already enough to stabilize market expectations.