Investors Pile Into French Government Debt
LONDON -- One of the more unusual stories of the week is Monday's announcement that the French government sold 6 billion euros of three-month and six-month treasury bonds at negative interest rates. This means that people are actually paying the French state for holding their money.
While the Germans and the Dutch have been selling bonds at negative interest rates for some time, it's surprising to see France join them, given that it lost its "AAA" credit rating in January and the new French president, Francois Hollande, had promised massive increases in public spending, spooking the markets.
It turns out that other factors are at work, in particular investors' concerns about the Spanish economy and President Hollande seemingly backtracking upon some of his promises, and this has increased the attraction of French bonds to many investors.
Spanish short-term rates have soared
Spain's problems, which have pushed up the interest rates on Spanish debt, are helping France to sell its own debt. Last month an issue of six-month Spanish government bonds was sold at an interest rate of 3.24%, compared with just 1.74% in May, and over the same period the rate on three-month debt rose from 0.85% to 2.36%.
Many European financial institutions need to own euro-denominated debt because they have euro-denominated liabilities. The near-tripling of Spanish short-term interest rates has made French debt more attractive to risk-averse investors, allowing France to issue debt at negative interest rates.
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The investment angle
The rush of money into French bonds is telling us that Spain's economic difficulties may be a bit more serious than previously thought. If my tolerance for risk today were nearly as high as it was 10 years ago, I would now be looking for bargains in the Spanish stock market. That's because a crisis will often cause riskier shares to become oversold as investors flee into the security offered by government bonds.
British Prime Minister David Cameron recently suggested that any French citizens who were thinking of fleeing Hollande's 75% income tax rate would be welcome to join the French expat community in London. If they do this in large numbers, joining the many wealthy foreigners who use London as a safe haven, this should push up house prices.
Aside from buying a house or flat, it's difficult to invest directly in the London residential property market. One option that springs to mind is Capital & Counties (ISE: CAPC.L) , with its mixture of commercial and residential property and developments in central London.
If I were going to invest in Europe, I'd probably use an investment trust like Henderson Eurotrust whose portfolio is packed with European-based multinationals. However, I'm waiting for the day when Pernod Ricard shares trade at a price-to-earnings ratio that's a couple of points below that of its larger rival Diageo so I can expand my portfolio of distillers.
But if you want a British company with lots of exposure to Europe, Imperial Tobacco (ISE: IMT.L) fits the bill because of its strong presence there -- especially in France, as it owns the two most famous French cigarette brands: Gitanes and Gauloises.
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At the time this article was published Tony owns shares in Diageo but he does not own shares in any of the other companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Diageo. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.