A DENSE POLITICAL CALENDAR AHEAD

Against a backdrop of persistently challenging and volatile global interest rates, exacerbated by elevated energy prices, European bond markets are entering a renewed phase of fragmentation. Government bonds are under pressure amid widespread political instability, which poses a material risk to fiscal discipline in several countries. Although any future political developments may prove less disruptive than current market expectations suggest, the renewed widening of sovereign spreads is likely to persist over the coming months and may intensify as a dense political calendar unfolds.

At present, however, neither absolute spread levels nor the extent of contagion appears sufficient to warrant the imminent activation of the backstop instruments available to governments and central banks. We would need to see further market repricing before policy intervention becomes likely.

Increasing European bond market fragmentation heightens the need for stronger domestic investor bases, potentially requiring significant portfolio reallocations. Meanwhile, lapse risk remains a material concern for insurance portfolios.

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