Risk premium moves to the core: CDS widened in all 14 of the 14 countries reporting on 21 September, and France overtook Italy

Yesterday's missing half: developed markets widened too

Talay Insight's Latin America report of 22 September noted that the risk premium had widened in tandem in six of the seven emerging markets reporting observations on 21 September, but that no data were available that day for Türkiye, Germany, France, Italy, Japan, the UK and South Africa. As of 23 September the source pages have published the 21 September closes and the picture is complete. In all 14 of the 14 countries on the panel with a value for 21 September, 5-year dollar-denominated CDS rose from 18 September. The US series still has no 21 September close; the last value is 31.50 basis points on 18 September.

The proportional ranking runs contrary to expectations. The largest widening was in Germany, up from 7.37 to 8.49 (15.2%); it is followed by Japan (9.2%, from 22.83 to 24.93), the UK (9.0%, from 18.57 to 20.24), South Africa (8.4%), Brazil (8.3%) and France (8.2%, from 43.60 to 47.19). Italy widened 5.2%, Türkiye 4.1% (from 232.80 to 242.43), Egypt 1.6% and China only 0.9%. In other words, the move on 21 September was not an emerging-market-specific flight but a pricing day that included developed markets as well.

This finding should not be overstated. Germany's 15.2% increase amounts in absolute terms to only 1.12 basis points, and because liquidity is thin in single-digit CDS, proportional changes look large. What is meaningful is that the widening was not confined to a single region or credit rating group, and that it ranged between 4% and 15% in every country except China.

The common denominator: three central banks in the same direction

The most consistent explanation for this synchronicity is that the global interest-rate regime has clarified in the direction of tightening at three major centres at once: two central banks hiked in the same week, and at the third markets are pricing further hikes. The Fed raised its policy rate to a 3.75–4.00% range on 16 September. The Bank of Japan, by a 7–2 vote on 18 September, took its rate from 1% to 1.25%, the highest level in 31 years. The ECB's key rate stands at 2.5% after two hikes over the summer and, according to Reuters, markets are pricing 3 or 4 more hikes over the coming year.

Two speeches on 22 September did not weaken this pricing. Richmond Fed President Tom Barkin recalled that core PCE was 3.3% in July and that firms expect price increases of 4.1% for 2027, leaving the question of further hikes open. Bundesbank President Joachim Nagel said he could not rule out the ECB moving into mildly restrictive territory if energy prices stay high; objections from Lagarde and Vujcic that rates do not move one-for-one with oil, meanwhile, suggest the next step could wait until December.

The pricing is clearest at the front end. The US Treasury sold $69 billion of 2-year notes at 4.787% on 22 September; at the auction of the same size in August the yield was 4.204%. The bid-to-cover ratio held at a normal 2.63, meaning the problem is price, not demand. At the long end, the 10-year Treasury yield was 5.01% on 18 September and 4.96% on 21 September according to FRED; Germany's 30-year yield was 3.81% on 22 September.

Reordering in Europe: France ahead of Italy

The most visible consequence of the regime in Europe is a change in the definition of the periphery. On 22 September France's 10-year yield spread over Germany rose to 102.0 basis points; the spread was 84.2 basis points on 7 September, and its range over the past year is 59.0–102.0. The same day the Italy-Germany spread was 89.3 basis points. Paris is paying a premium 12.7 basis points higher than Rome.

CDS data confirm the same ranking from an independent market. From 17 August to 21 September France's 5-year premium rose from 31.24 to 47.19 (51.1%) and Italy's from 29.36 to 39.15 (33.3%); the gap between them widened from 1.88 basis points to 8.04 basis points. Over the same period Japan's premium fell 8.0% and Brazil's 4.3%. The sovereign risk that deteriorated fastest in a month belongs not to an emerging market but to the euro area's second-largest economy.

This picture creates a constraint for the ECB. While rate hikes respond to energy-driven inflation, a premium widening in a core country increases the risk of fragmentation in the bond market. The difference in tone between Nagel and Lagarde partly reflects this dilemma: one focuses on energy prices, the other on a hiking path that markets are pricing too quickly.

Transmission to Türkiye

Türkiye's 5-year risk premium rose to 242.43 basis points on 21 September, up 10.9% from 218.67 on 17 August. Proportionally, the 4.1% move on 21 September was in the lower half of the panel; in other words, Türkiye did not diverge that day but moved within the bloc. In level terms, however, it is about 7.6 basis points away from the 250 basis point threshold.

Transmission works through three channels. First, the rise in the 2-year dollar yield to 4.787% makes short-term dollar funding more expensive and narrows the yield differential of carry trades. Second, rising benchmark premiums in the euro area lift the comparison base for Türkiye's euro-denominated borrowing. Third, the ECB turning towards energy-sensitive tightening could weigh on demand in Türkiye's largest export market.