A Contrarian Amid the Selloff in French Bonds: 370 billion AUD Pension Fund Increases Holdings, Betting That Fiscal Risks Are Overestimated

It has been learned by Zhihui Finance APP that Australia’s second-largest pension fund is purchasing French government bonds. The institution believes that the market has overly priced in both France’s fiscal difficulties and the prospect of further interest rate hikes by the European Central Bank.

According to senior portfolio manager Jimmy Louca, Australian Retirement Trust (ART) began increasing its holdings when the yield on 10-year French government bonds exceeded 4.5% in September, and accelerated purchases during the sell-off in October—when concerns over France’s fiscal credibility and political instability pushed the yield to 5%, the highest since 2002.

“We think the market has excessively priced in both the extent of rate hikes by the European Central Bank and the possible fiscal deterioration in this cycle,” Louca said in an interview. The company manages assets of approximately 370 billion Australian dollars (about 260 billion US dollars).

France’s debt woes recall the eurozone debt crisis. Political turmoil, combined with street protests, has made it difficult for France to control a ballooning debt load. Against a backdrop of most investors exiting the market and betting that further ECB hikes will continue to dampen demand, ART’s buying behavior stands out. This unease has spilled into the euro, making it the worst-performing G10 currency against the US dollar this month.

Louca explained that ART’s increased holdings of French government bonds are part of its dynamic asset allocation strategy: taking advantage of opportunities when market prices fall below what the fund calculates as fair value and pricing dislocations arise. As a long-term investor, the fund follows a buy-low, sell-high approach to seek returns for its members.

He noted that in October, French yields climbed above 5%, deviating even further from the company’s assessment of fair value and prompting increased exposure during the recent market dislocation.

Louca believes this round of selling reflects a sharp repricing of fiscal risk. The spread between French and German 10-year government bond yields has doubled since early September, reaching roughly 170 basis points last week—the widest gap since the eurozone debt crisis in 2011.

Investors are particularly focused on near-term risks, namely that opposition to the government’s 54 billion euro (about 61 billion US dollars) fiscal plan could hamper efforts to repair the public finances. But Louca says that both the government and the National Rally will ultimately bring deficit-reduction proposals into the 2027 election.

It is reported that last Friday, Moody’s did not downgrade France’s sovereign rating, and over the weekend, France did not see a repeat of large-scale unrest or looting, giving the country a brief reprieve. On Monday, French 10-year government bond futures rose by 68 ticks to 108.31.

Macro strategist Brendan Fagan commented: “This institutional perspective is surprisingly optimistic about France’s reform prospects, but given the ratings level of comparable sovereigns, a Moody’s downgrade of France’s sovereign rating still seems very likely.”

ART also believes that markets may be overestimating the extent to which the European Central Bank needs to raise rates. While higher energy prices are currently pushing up inflation, they are also squeezing incomes and growth, and the fund expects this will ultimately cool inflation and lower yields.

Reportedly, France is just one of the overweight targets in this strategy, with Australia and the United Kingdom also included. ART believes inflation and fiscal risks are also being overly priced in these markets. The fund is slightly underweight on US and Japanese government bonds, citing the strong economies and inflationary pressures in both countries, which it believes are not yet fully reflected in government bond yields.

Louca referenced Europe’s recovery from the last debt crisis, arguing that France should be viewed with a long-term perspective.

He added: “The road ahead may be bumpier and take longer than short-term investors expect, but it should be noted that Greece and Italy have now achieved primary fiscal surpluses, something that was nearly unimaginable back then.”