Bond investors are willing to impose a higher interest rate on French government loans for years, in a regime change that could have far-reaching consequences for Europe’s second-largest economy.
Even if Marine Le Pen’s national rally fails to achieve an absolute majority in the next vote, Zurich Insurance Company and Neuberger Berman say the market will continue to demand a higher yield to buy French debt. Others, including Société Générale SA, anticipate that the political uncertainty that has weighed on bonds will persist until the 2027 presidential election.
Since President Emmanuel Macron called an early vote earlier this month, the French 10-year bond yield has risen more than 30 basis points and It is currently hovering around 80 basis points, a level last seen during the euro zone sovereign debt crisis more than a decade ago.
“We’ve had a sea change in terms of where France is going to trade relative to Germany,” said Guy Miller, chief market strategist at Zurich Insurance Company. “I just don’t think French bonds will trade again at the spread level they had in the past.”
The factors driving the price revision are two. ANDLe Pen’s party, which has a considerable lead in the polls, has touted some costly budget measures despite growing concerns about France’s debt burden, although he has walked back some of the promises in recent days as he seeks greater credibility on economic affairs.
And there are fears, at least marginally, that the rise of the far right would fracture relations with the EU. and could one day pose a challenge to the existence of the euro zone.
The likelihood of French bond yields stabilizing at a higher level has far-reaching consequences for the economy. France’s Finance Ministry estimates that the higher price of borrowing would cost the state 859 million euros ($921 million) a year. If the level persists, after five years, the additional annual cost would be between 4,000 (US$4,288) and 5,000 million euros (US$5,361), and between 9,000 (US$9,650) and 10,000 million euros (US$10,722 million) after of 10 years.
Societe Generale warns that this risk premium is likely to persist even if Macron’s party surprises pollsters by winning a parliamentary majority in the coming weeks. This is because an even stronger far-right contingent could complicate the law-making process and hinder reforms.
Even in the “best-case scenario” for markets with a majority of Macron’s party, “the idiosyncratic premium for French bonds could shrink, but not disappear completely,” said Adam Kurpiel, head of rates strategy at Societe Generale.
In this scenario, which goes against current surveys, the Franco-German differential could narrow, but not below the range of 50 to 55 basis points., he added, while a victory in the National Rally could see the differential find a new equilibrium in the range of 75 basis points. at 90 basis points.
“Therefore, the authorities could underestimate the risk of an OAT regime change,” Kurpiel said. France’s first bond sale since Macron called an early election this month went ahead as planned on Thursday, a sign that yields are high enough to attract new buyers.
The Paris Treasury raised 10.5 billion euros ($11.3 billion) through three- to eight-year bond auctions, matching the high end of your target, although given how active traders tend to be in these sales, the results may not necessarily sound as good. Everything clear.
Stretched finances
The electoral battle is shedding light on the country’s already strained finances. Without further measures to control the budget, The International Monetary Fund said debt would rise to 112% of economic output in 2024 and rise about 1.5 percentage points a year in the medium term.
The European Union reprimanded France on Wednesday for running a deficit that exceeds the bloc’s 3% limit, and S&P Global Ratings downgraded its sovereign credit rating just last month. “The fiscal situation is not very good,” said Robert Dishner, senior portfolio manager at Neuberger Bermam.
Still, the fact that the Franco-German differential is stabilizing at current levels is not necessarily cause for panicaccording to Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
“The market is pricing in a higher risk premium, but we don’t expect a full-blown sovereign crisis,” Ahmed said on Bloomberg TV. “The differential between France and Germany at 120 basis points would be worrying, we are a bit far from that.”
Others anticipate that the growing momentum is far from over. Federated Hermes forecasts the yield gap will widen 90 basis points ahead of the election, while Capital Economics says 100 basis points could be the new normal.
“There could still be a lot of volatility,” said Chris Iggo, chief investment officer at AXA Investment Managers. “It’s hard to see the spread going back to the level it was three or four weeks ago.”
