The OMFIF Podcast Sovereigns, spreads and stability in Europe
Dec 18, 2025
Jeremy Cunningham, an investment director at Capital Group with deep expertise in fixed income markets, dives into the dynamics of European sovereign debt. He discusses the recent stabilization of inflation and the European Central Bank's neutral rates. The intriguing BTP–OAT repricing highlights fiscal improvements in Italy against French risks. Cunningham also examines how EU's expansion as a AAA issuer is reshaping credit structures and the implications of creating a euro safe asset, predicting a future of tighter sovereign spreads.
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Lower Volatility, Curve Divergence
- European fixed income is moving toward lower volatility as ECB policy sits closer to neutral.
- Short‑end yields should remain stable while long‑end faces pressure from supply and growth.
Fiscal Divergence Drives BTP‑OAT Moves
- BTP‑OAT spread tightening reflects both Italy's fiscal gains and France's political constraints.
- Italy runs a primary surplus while France carries a larger persistent deficit, altering risk premia.
Ownership Shapes Yield Sensitivity
- Ownership profiles materially affect sovereign yield sensitivity and liquidity.
- France's high foreign non‑bank ownership makes OATs more price sensitive than Italy's market.