The EFSF’s spreads have drifted out because of such uncertainty over its funding remit and its responsibilities. Investors do not know what they are buying into for as long as the entity remains political Play-Doh.
Nonetheless, its bonds are backed — and over-collateralised — by Europe’s best sovereign credits with the largest guarantor being Germany whose bonds will cost you around 124bp in yield versus the EFSF in the five year sector and 108bp in the 10 year sector. It is hard to see how anybody holding blocks of German paper can be beating their financing costs enough to make any money.
France’s five year bonds trade 91bp or so over Germany in the five year sector and around 104bp in the 10 year sector. France is not immune from the debt crisis by any means but the difference between French and German yields is mostly because of the flight to quality to the Bund that has taken place as investors panic.
France is not cheap but if you do not like the uncertainty of the EFSF, it offers spread over Germany plus a degree of certainty (with certainty being admittedly, a relative concept at best these days).
This trade can go one of two ways. Europe can get a grip of its sovereign finances and banking sector problems, the EFSF’s job and funding task will become more clearly defined and, all things being equal, those spreads will come back in.
The EU has to opt for this because the alternative would be the continued escalation of the debt crisis to the point of a complete lack of confidence in its governance, value and credit.
That is the downside and at that point you could own whatever European paper you liked, you would still lose your shirt, your house and possibly your mind. In such an event, Europe failing to heal itself is so catastrophic that a dodgy position in the EFSF and France will be the least of anyone’s worries.