Euro Area sovereign spreads tightened. Italy’s 10-year BTP yield fell 0.6bps to its lowest level since December 2024, and France’s 10-year OAT yield fell 1.2bps to its lowest since July. By contrast, the 10-year Bund yield rose 0.1bps and was broadly unchanged. France’s 10-year spread over Germany narrowed to 55bps, the tightest since President Macron called a snap legislative election in June 2024. This move shows French bonds outperforming German debt.

Uk Politics As A Cross Market Risk

Deutsche Bank said UK politics could weigh on wider European market sentiment. A by-election is being held in the Greater Manchester seat of Gorton and Denton. Labour won the seat by a large margin in the 2024 general election, but current polling suggests it could lose. Deutsche Bank said a loss could raise pressure on Prime Minister Starmer and bring back worries about fiscal loosening and renewed gilt market volatility. European government bond spreads are narrowing, which is usually supportive for the Euro. Looking back to last year, French spreads over German bunds moved to their tightest levels since the June 2024 snap election. This suggests markets are not currently pricing in major political risk from within the Eurozone. Attention is now shifting to UK politics as a possible source of stress that could spill into Europe. A key by-election result is due today. If the governing Labour party loses, it could weaken Prime Minister Starmer and revive fears of fiscal loosening—an issue that has historically unsettled investors.

Options Markets Signal Rising Hedging Demand

These concerns are already showing up in derivatives markets. One-month implied volatility in EUR/GBP options has risen from 5.5% to 7.1% over the last ten trading days, suggesting traders expect bigger currency moves. Risk reversals also show rising demand for GBP puts, a bearish signal not seen since the tense budget debates in early 2025. Given the risk that UK instability could hurt sentiment toward Europe, EUR/USD put options may help hedge against a potential decline. They would act as insurance if a UK political shock triggers a move out of European assets. In that scenario, a break below 1.0600 in EUR/USD—strong support over the past quarter—would look more likely. Overall, the picture is mixed: Eurozone sovereign debt looks calm, but UK political risk is rising. For traders who think the UK risk will stay contained, still-moderate Euro volatility could make selling out-of-the-money EUR/USD put spreads an appealing way to collect premium. This works best if UK political noise fades over the next few weeks without dragging down the Euro. Create your live VT Markets account and start trading now.

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