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European Bonds More Attractive Than U.S. Treasuries Amid Election-Driven Volatility

European Bonds Surge as French 10-Year Yield Hits 3.23% Amid Election Uncertainty, Bill Gross Sees Growing Attractiveness

By Bill Bullington

6/10, 17:49 EDT
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Key Takeaway

  • European bonds, particularly French and German, are becoming more attractive than U.S. Treasuries amid election-driven volatility.
  • Bill Gross highlights potential market impacts from upcoming U.S. elections, suggesting increased uncertainty could affect Treasury yields.
  • Investment opportunities identified by Gross include Energy Transfer LP, Western Midstream Partners LP, regional banks like KeyCorp and Truist Financial Corp., Microsoft, and NextEra Energy.

European Bond Market Reaction

The European bond market experienced significant volatility following unexpected election results in France and Germany. French President Emmanuel Macron and German Chancellor Olaf Scholz faced surprising defeats in the European Parliament elections, leading to a notable market reaction. The yield on 10-year French bonds surged by more than 12 basis points to 3.23%, the highest level since November. German and Italian bonds also saw sell-offs on Monday, reflecting heightened uncertainty in the region.

Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co., commented on the attractiveness of European bonds compared to U.S. Treasury bonds. "There’s coming a point where European bonds are more attractive than Treasury bonds, in my opinion," Gross said on Bloomberg Television. He noted that the spreads between German 10-year bunds and French 10-year bonds have narrowed significantly relative to Treasuries in recent months.

Market Uncertainty and Policy Implications

Gross highlighted the broader implications of recent election outcomes in various countries, including Mexico, India, and South Africa, where unexpected results have disrupted markets. He suggested that the U.S. could face similar market impacts as the November elections approach. "What we’ve seen last night and what we’ve seen the last few weeks is a reaction to uncertainty, in terms of not only the party that’s dominating, but uncertainty as to what their policies will be," Gross explained. He emphasized that as election outcomes become clearer, the uncertainty and potential policy implications could significantly impact U.S. Treasuries.

The market's reaction to the French snap election has been particularly pronounced. Traders have pushed the yield on 10-year French bonds higher, and there is an expectation that France's longer-dated bonds will underperform their German counterparts in the coming weeks. The spread between French and German 10-year bonds, currently at 51 basis points, could widen to 64 basis points depending on the election outcome. This reflects the political risk premium being incorporated into French securities.

Investment Opportunities

Despite the market volatility, Gross identified several investment opportunities. He expressed a preference for pipeline master limited partnerships, including Energy Transfer LP and Western Midstream Partners LP. Gross also finds value in regional bank stocks such as KeyCorp, Truist Financial Corp., and Citizens Financial Group Inc. Additionally, he holds positions in Microsoft as an artificial intelligence play and NextEra Energy, a utility company.

Gross acknowledged potential challenges for the stock market as the economy slows but remains optimistic about specific sectors. "There could be a problem for the stock market as the economy slows," he said, but he still sees attractive opportunities in certain areas.

Street Views

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bullish on European bonds):

    "There’s coming a point where European bonds are more attractive than Treasury bonds, in my opinion... In terms of attraction, the German 10-year bunds and French 10-year, their spreads have narrowed significantly in the past month or two relative to Treasuries and today as well."

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bearish on US stock market):

    "What we’ve seen last night and what we’ve seen the last few weeks is a reaction to uncertainty... As we move to November, and something becomes more clear as to who might or who might not win, the uncertainty plus the potential policy implications could impact Treasuries significantly."
    "There could be a 'problem' for the stock market as the economy slows."

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bullish on pipeline master limited partnerships including Energy Transfer LP and Western Midstream Partners LP):

    "[I] still find a few areas attractive... [including] pipeline master limited partnerships such as Energy Transfer LP and Western Midstream Partners LP."

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bullish on regional bank stocks including KeyCorp (KEY), Truist Financial Corp (TFC), Citizens Financial Group Inc (CFG)):

    "[I also like some regional bank stocks], such as KeyCorp (KEY), Truist Financial Corp (TFC)and Citizens Financial Group Inc (CFG)."

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bullish on Microsoft):

    "[I own Microsoft] as an artificial intelligence play."

  • Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co. (Bullish on NextEra Energy):

    "[I also own NextEra Energy], a utility company."