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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays), and a new monthly Q&A format called the Confluence Mailbag.
Welcome to the Confluence Investment Management Asset Allocation Bi-Weekly report for 10/19/2026. I'm Phil Adler. The US isn't the only market where bond yields are rising. Confluence Chief Carket Strategist Patrick Fearon Hernandez joins us today to discuss why investors should keep an eye on Europe where the euro has been under pressure. Patrick, we all know bond yields are influenced by a number of factors.
Phil Adler:Are similar factors driving up yields in both The United States and Europe?
Patrick Fearon-Hernandez:Well, hi, Phil. Thanks for having me on the program. To answer your question, yes. I think many of the same forces are at work on both sides of The Atlantic. Investors are contending with lingering inflation concerns, elevated government borrowing needs, and uncertainty surrounding economic growth.
Patrick Fearon-Hernandez:There's also a tremendous amount of capital being directed toward artificial intelligence infrastructure, data centers, energy systems, and related technologies. All of that investment competes for savings and can put upward pressure on interest rates. At the same time, governments around the world have become accustomed to running larger deficits than they did before the global financial crisis, meaning bond markets are being asked to absorb a growing supply of debt. So while the specific circumstances may vary from country to country, the general backdrop of growing capital demands and fiscal pressures is contributing to higher yields in both The United States and Europe.
Phil Adler:And what is different about Europe that may be placing even more pressure on yields there?
Patrick Fearon-Hernandez:Well, the key difference is that Europe enters this period with slower economic growth and greater structural challenges than The United States. The most obvious example is France. The country has struggled with persistent budget deficits, a rising debt burden, and a political environment that has made meaningful fiscal reform difficult. Investors generally become nervous when debt is rising faster than the economy because it raises questions about how that debt will ultimately be financed and serviced. In a rapidly growing economy, higher debt levels can be more manageable.
Patrick Fearon-Hernandez:In a slower growing economy, however, the margin for error becomes much smaller. As a result, investors have become increasingly sensitive to Europe's fiscal situation, particularly in France. And that sensitivity is showing up in bond markets through higher yields and wider risk premiums.
Phil Adler:Do you think the economic situation in France has the potential to become even more serious?
Patrick Fearon-Hernandez:I do think there's a risk that the situation could become more serious, although I would emphasize that we aren't forecasting a crisis. France remains one of the world's largest economies and possesses significant economic strengths. However, markets are increasingly focused on the trajectory of government finances. The challenge is that higher bond yields increase borrowing costs, which in turn can make deficits more difficult to reduce. If investors begin to demand even higher yields for holding French debt, that process can become self reinforcing.
Patrick Fearon-Hernandez:Add to that an environment of political fragmentation and limited consensus around fiscal reforms, and you have a situation that deserves close attention, the most likely outcome isn't a sudden crisis, but rather a gradual deterioration that puts added pressure on policymakers over time.
Phil Adler:Patrick, I do remember when the European Central Bank participated in a bailout fund for Greece. In exchange, Greece agreed to some extreme austerity measures. And I was wondering, is this possibility on the horizon somewhere out there for France?
Patrick Fearon-Hernandez:Well, at this stage, that remains a low probability outcome. You know, Greece was a relatively small economy, and European policymakers viewed its troubles as something that could be isolated and managed. France is an entirely different case. It's one of the core members of the eurozone and one of the largest economies in Europe. The idea of imposing Greek style austerity measures on France would be politically and economically difficult.
Patrick Fearon-Hernandez:That said, market discipline can still play important role. If borrowing costs rise and investors become increasingly concerned about fiscal sustainability, French policymakers may ultimately have little choice but to pursue spending restraint or other measures designed to improve the country's finances. The likely path, though, would be gradual adjustment rather than the kind of dramatic externally imposed austerity that Greece experienced.
Phil Adler:Well, while we're on the the general subject of low probability outcomes, I have to ask this question. Is it plausible to consider that France might exit the European currency?
Patrick Fearon-Hernandez:It's plausible enough that people occasionally discuss it, but I still view it as unlikely. The cost associated with exiting the euro would be enormous. There would be legal questions, financial market disruptions, contract issues, banking concerns, and potentially significant economic uncertainty. For those reasons, I don't think France is close to taking such a step. However, the fact that knowledgeable investors are even willing to entertain the possibility tells us something important.
Patrick Fearon-Hernandez:It tells us that concerns about fiscal sustainability and the long term cohesion of the monetary union have not disappeared. Even if exit remains unlikely, the market's willingness to discuss the idea reflects a decline in confidence relative to where we were a decade or two ago.
Phil Adler:Well, it appears all of these factors have converged to put pressure on the euro. How has the euro been impacted by rising bond yields across Europe?
Patrick Fearon-Hernandez:The euro has come under pressure despite rising bond yields, and that's an important distinction. In normal circumstances, higher yields can attract capital and support a currency. However, the reasons behind rising yields matter. If yields are moving higher because economic prospects are improving, that's generally positive for a currency. But if yields are rising because investors perceive greater fiscal or political risk, the currency can weaken instead.
Patrick Fearon-Hernandez:That's what we think has been happening in Europe. Investors are increasingly focused on debt burdens, political uncertainty, and concerns about long term economic competitiveness. As a result, the euro has weakened even as yields have moved higher. The currency market is effectively telling us that investors view the risks associated with those higher yields as more important than the additional income they provide.
Phil Adler:Well, taking a step back, does the euro currently remain in an acceptable range when you consider its longer term performance against the dollar?
Patrick Fearon-Hernandez:Against the dollar, I would say the euro remains within a range that's broadly consistent with its longer term history. It is certainly weaker than where it started the year, but it's not trading at levels that would appear exceptionally distressed when compared with previous decades. That's one reason we chose not to focus exclusively on the euro dollar exchange rate in this report. Looking only at the dollar can sometimes create a distorted picture because the dollar itself is affected by a unique set of economic and policy factors. To better understand the euro's standing, we think it makes sense to compare it against another European currency that's exposed to many of the same regional influences but has a different policy framework and fiscal background.
Patrick Fearon-Hernandez:That leads us naturally to the Swiss Franc.
Phil Adler:And why is the Swiss Franc good measuring stick?
Patrick Fearon-Hernandez:Well, the Swiss Franc is useful because Switzerland provides an excellent point of comparison. It's geographically in the middle of Europe, deeply connected to European trade and commerce, and heavily influenced by many of the same macroeconomic trends that affect the Eurozone. At the same time, Switzerland maintains a reputation for fiscal discipline, political stability, low inflation, strong institutions, and prudent monetary management. Investors around the world have long seen the Franc as a safe haven currency. When uncertainty rises, money often flows into Switzerland rather than away from it.
Patrick Fearon-Hernandez:Because the Franc serves as a kind of benchmark for stability within Europe, comparing the Euro against the Franc can tell us whether investors are becoming more or less confident in the broader Eurozone project. Project. In that sense, the Franc acts as a particularly revealing measuring stick.
Phil Adler:And what does this comparison currently show?
Patrick Fearon-Hernandez:Well, the comparison paints a fairly striking picture. Over the long run, the euro has steadily lost value relative to the Swiss franc. This trend has persisted through multiple economic cycles, various European political challenges, and different interest rate environments. What's especially interesting is that Switzerland has often had lower interest rates than many of its neighbors, yet investors have still been willing to own the Franc. That suggests people value the perceived stability and safety of Swiss institutions enough to accept lower yields.
Patrick Fearon-Hernandez:From perspective, the long term decline in the euro versus the Franc is an indication that investors continue to harbor doubts about the fiscal and political structure of the Eurozone. It doesn't mean the euro is destined to fail, but it does suggest a persistent preference for Swiss stability over broader European integration.
Phil Adler:I wonder about the message right now for investors. Is it simply to be aware, or is it time right now to lighten up maybe on European assets?
Patrick Fearon-Hernandez:Well, I think the most important message right now is awareness and selectivity. We're not suggesting investors should abandon Europe altogether. Europe remains home to many outstanding firms, sophisticated capital markets, and important industries. However, we do think investors should recognize that the macroeconomic backdrop has become more challenging. Currency trends, fiscal conditions, and political developments are all creating additional uncertainty.
Patrick Fearon-Hernandez:Rather than making a broad bullish or bearish call on Europe as a whole, we think it makes more sense to evaluate opportunities at the sector and company level. In other words, investors should focus on where fundamentals remain strong rather than assuming that all European assets will benefit equally from regional economic trends.
Phil Adler:Patrick, I wanna ask another one of those low probability questions. Do you see a time coming perhaps when The US might find it necessary to to shore up the euro the way The US supported the Japanese yen to prevent a sell off of US treasuries?
Patrick Fearon-Hernandez:Well, that's a possibility, but it would likely require a much more severe situation than what we're seeing today. The euro remains one of the world's most important reserve currencies, and the European Central Bank has substantial tools available to address market stress. European governments also have strong incentives to preserve confidence in the monetary union. For The US to become actively involved, we would probably need to see instability severe enough to threaten the global financial system or materially affect US financial markets. Could that happen someday?
Patrick Fearon-Hernandez:It's impossible to rule out entirely. But from today's perspective, that's not the scenario we would consider most likely.
Phil Adler:Well, final question for today. Does the possibility of an eroding euro in any way impact Confluence Investment Management's positive sentiment on certain European stock sectors, including defense stocks?
Patrick Fearon-Hernandez:That's a complex question. There are certainly cases where a weaker currency can actually benefit certain industries. Export oriented firms often become more competitive when their home currency declines because their products become relatively cheaper in foreign markets. In addition, many of the sectors we favor are benefiting from very specific long term drivers that extend beyond the currency issue. Defense is a good example.
Patrick Fearon-Hernandez:European nations continue to increase military spending in response to changing geopolitical realities, and that spending trend could persist for years. The same can be said for certain industrial and technology related businesses that are benefiting from structural investment themes. So while currency weakness is something we monitor carefully, it doesn't necessarily mean that we're ready to walk away from all European stocks.
Phil Adler:Thank you, Patrick. The title of this week's report is the euro versus the Swiss franc, and you can find a link to the written report dated 10/19/2026 on the Confluence webpage, Confluence Investment dot com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This does not constitute a solicitation or an offer to buy or sell any security.
Phil Adler:Our audio engineer is Dane Stole. I'm Phil Adler.