Australia's No. 2 Pension Fund Buys French Government Bonds at 5% Yields, Calling Market Fear Excessive

Australian Retirement Trust (ART), Australia's second-largest pension fund, began buying French 10-year government bonds last month once yields topped 4.5%, and added to its position this month as yields climbed into the 5% range, according to financial markets reporting dated October 26 (local time). The fund, which manages about A$370 billion (approximately $260 billion), made the purchases as part of a dynamic asset allocation strategy aimed at buying undervalued assets.

ART's position rests on the view that the market has overreacted on two fronts. Jimmy Louca, a senior portfolio manager at ART, said in an interview that "the market is overpricing both aspects," arguing that the scale of ECB rate hikes and the degree of fiscal deterioration have been over-reflected in prices. He said yields above 5% widened the gap with the fund's own fair-value estimate, which prompted the expanded exposure. ART expects the government and the National Rally to campaign on the €54 billion (approximately $60.6 billion) austerity plan ahead of the 2027 presidential election. Louca acknowledged the process "may be bumpier and take longer than short-term investors would like," but pointed to Greece and Italy, which were considered nearly impossible to fix during the previous debt crisis and now run primary fiscal surpluses.

Market stress has been concentrated in French debt. Yields have risen on concerns that protests and strikes against the austerity plan, along with the start of the presidential election cycle, could derail fiscal reform. The French-German spread has doubled since early last month to about 170 basis points, the widest since the 2011 eurozone debt crisis, and the euro was the weakest Group of 10 currency against the dollar this month. The French government avoided a Moody's sovereign downgrade on the 23rd, and on the 26th French 10-year bond futures rose 68 ticks to 108.31 as large-scale arson and looting eased over the weekend.

ARTs view also diverges from the market on monetary policy. It expects rising energy prices to lift inflation in the near term, but to weigh on household real incomes and growth, ultimately pulling government bond yields lower. Beyond France, ART is overweight Australian and UK government bonds, where it sees inflation and fiscal concerns as over-reflected, and underweight US and Japanese government bonds, where it believes solid growth and price pressures are not fully priced into yields.

Not all market participants share the optimism. Macro strategist Brendan Fagan described ART as "surprisingly optimistic on the outlook for French reform," and argued that, given the credit ratings of comparable sovereigns, a Moody's downgrade of France will be difficult to avoid. How French yields and the spread evolve will likely shape the broader European bond market, with the pace of political resolution seen as key to narrowing the France-Germany gap.