ING warns France, Middle East tensions could unsettle markets in 2027

Photo: ING Group

BAKU, Azerbaijan, October 22. Political uncertainty in France and the conflict in the Middle East could trigger periods of volatility in financial markets in 2027.

This was stated in ING’s report, “2027 Credit Instruments Outlook.”

According to the report, asset swap spreads have initially shown resilience to geopolitical instability and related economic changes this year. Despite some volatility in March following the outbreak of the conflict between the U.S., Israel, and Iran, spreads quickly recovered and approached historic lows.

“However, further escalation of the conflict in the Middle East and the lack of a clear path to resolution could increase pressure on spreads.

In addition, budgetary and political issues in France, volatility in the spreads between French OAT government bonds and German Bunds, as well as broader fiscal risks in Europe, have recently led to a renewed widening of spreads.

The combination of political uncertainty in France and the conflict in the Middle East could lead to periods of market volatility in 2027. However, analysts do not expect these factors to have a significant negative impact on the supply of bank bonds," the report states.

Furthermore, the report notes that, depending on when such periods of widening spreads occur, financial institutions may show less interest in raising funds in advance to repay obligations scheduled for 2028.

According to the ING report, the volume of euro-denominated bank bond issuances is expected to reach 450 billion euros in 2027: “Net supply will amount to 57 billion euros, compared with 89 billion euros in 2026.”

“According to our estimates, the volume of covered bond issuance will total 185 billion euros, including 180 billion euros in benchmark-sized issues, some of which are floating-rate, and 5 billion euros in smaller-sized issues. This is 5 billion euros less than our forecast for 2026. The decline reflects the pre-funding already carried out by issuers this year in preparation for a historically high volume of redemptions.

In addition, forecasts for mortgage lending next year point to stagnation, which will to some extent limit further growth in the issuance of covered bonds. At the same time, as work on the securitization package enters its final stage, issuers with high financing needs may redirect part of their secured instrument issuance toward securitization for diversification purposes,” ING reports.

The report emphasizes that growing demand for covered bonds from foreign investors, against the backdrop of regulatory changes, may also contribute to broader currency diversification and a reduction in the share of euro-denominated issuances.