Morgan Stanley on French Curve: Strategists Identify More Upside Before Shorting

Morgan Stanley’s trading team has flagged an interesting opportunity in the French curve, suggesting that eurozone debt investors should hold their positions for now. The analysts are not yet convinced it’s time to take profits on French government bonds, as they see further room for gains in these assets.

The Yield Spread Sweet Spot

The strategists laid out a specific trading thesis for French government bonds relative to their German counterparts. They plan to recommend a cross-market short only once the French curve outperforms by another 3 basis points from its current levels. This measured approach reflects a disciplined trading methodology—not jumping in prematurely but waiting for textbook signals. According to recent data from LSEG, the 10-year yield spread between French and German government bonds had settled around 58 basis points earlier in the week. This spread represents a key barometer of market sentiment regarding French fiscal health relative to the eurozone’s safest asset.

Model-Driven Positioning in French Government Debt

The bank currently holds a neutral stance on French government bonds, but their internal models tell a more nuanced story. Morgan Stanley’s proprietary trading system would only trigger a short position if the relative cheapness of French bonds falls below 5 basis points—a tighter threshold that reveals how precisely they calibrate market opportunities. This data-driven approach underscores how institutional investors view the French curve not as a simple directional bet, but as a relative value trade requiring specific technical conditions to materialize. The strategists are essentially saying: the French curve has legs, but we’re watching closely for when that advantage diminishes.

The French curve remains one of the most closely monitored spreads in fixed income markets, reflecting the interplay between economic growth expectations and risk sentiment across the continent.