Franklin Templeton Strategist Prefers Core European Bonds, Warns of Slowing Growth Ahead

David Zahn, head of European fixed income at Franklin Templeton, advocates overweighting German and Spanish government bonds while underweighting French and Italian debt due to elevated political risks and upcoming electoral uncertainty. Zahn anticipates European economic growth will decelerate starting in early 2027 as higher energy prices and elevated interest rates take hold, though he believes markets are pricing in excessive rate increases that could eventually ease. The strategist views the October 28 U.K. Budget as a key test for gilt markets, expressing particular concern about potential reductions in fiscal headroom that could negatively influence sentiment.

David Zahn's allocation strategy reflects divergent economic trajectories across eurozone sovereigns. He favors German and Spanish issuance while reducing exposure to French and Italian debt, with the latter facing electoral pressures in 2027 that may prompt fiscal expansion despite already elevated debt levels. Zahn anticipates a material economic slowdown beginning in early 2027, driven by energy cost pressures and the cumulative effects of higher borrowing rates that have already been implemented.

The strategist views current yield levels—approximately 5% in UK gilts and 4% in European bonds—as compensation sufficient to justify fixed income positioning, though he cautions against expecting rapid yield declines. He remains alert to the October 28 U.K. Budget as a potential market catalyst, particularly regarding any perceived erosion of fiscal flexibility that could shift sentiment toward British government debt.