Not all government bonds are created equal

Rising developed-market government-bond yields have restored selective value, but French debt remains an unattractive risk-reward proposition.

• US Treasuries are no longer an obvious underweight because their valuation relative to recent history and equities has improved, while real yields are approaching levels that have historically stressed parts of the economy.
• A sustained Treasury rally is not expected: growth remains strong, issuance from the Treasury and corporates is abundant, and the Federal Reserve's next moves are largely priced.
• Corporate earnings remain resilient, but stress is concentrated in CCC credit; weakness spreading to single-B credit in highly leveraged consumer cyclicals, software, or communications would signal broader economic damage.
• France's debt-to-GDP ratio is around 120%, long-term interest rates are more than 100 basis points above nominal GDP growth, fiscal deficits are in the mid-5% range, and foreign investors hold more than 60% of government debt.
• French spreads have reached levels last seen around the euro-area crisis, and an Italy-2018-style path could push them towards 300 basis points, although post-2012 euro-area backstops make a systemic sovereign crisis less likely.

Takeaway: Investors can once again hold US Treasuries for real income and diversification, but should avoid trying to catch the falling knife in French government bonds because a near-term fiscal improvement and sustained spread tightening appear unlikely.