Pressure is back on French government bonds which translate the Investor concerns for the government finances by Emmanuel Macron, also denounced by rating agencies, while I'm around the corner elezioni prezidenziali which could lead to problematic outcomes for the market.
I return of the French 10-year bonds, the Oat, rose above 4,50% this morning, leading the gap with its German counterpart, which represents the benchmark for Europe, up to 106,55. Although pressure has been seen in recent weeks on all bond markets due to the tightening of central banks to cause inflation to rise, the Oat/Bund spread show more 15 basis points compared to the BTP/Bund spread, as the market perceives French sovereign risk to be worsening compared to the Italian oneThe Oat/bund spread thus renews the maximum since 2012, before the promise of the then president of the ECB, Mario Draghi, to do whatever it takes. The yield spread has widened by about 30 basis points since the beginning of the year.
Oat/bund spread under spotlight ahead of presidential election
Lo spread between Oat and Bund it is becoming a indicator key eight months from the next presidential election of April 2027, analysts say. Investors are increasingly alarmed by the difficulties that France meets in reduce the high budget deficit ahead of the presidential elections, which could make this task even more difficult.” Although the presidential elections are still more than six months away, some of the proposals on the table are highly controversial, such as the plan by Jean-Luc Mélenchon, leader of the left-wing populist movement La France Insoumise, aimed at freeze public debt contracted during the pandemic,” writes Francesco Maria Di Bella, FI Strategist at UniCredit.
The latest polls indicate that Marine Le Pen is clearly ahead of the other current candidates and would win a possible run-off against Mélenchon, Édouard Philippe (centre-right, Horizons) and Gabriel Attal (center, Renaissance). The gap between Mélenchon and Philippe is very small. Polymarket currently estimates Le Pen's victory probability at 36%, Philippe's at 25%, and Mélenchon's at 13%.
Rating agencies are experiencing difficulties. Moody's is expected on October 23.
Last week the rating agency Dbrs The ECB confirmed its AA rating for France, but lowered the outlook from stable to negative. The ECB will also review the country's credit rating on October 23. Moody's. UniCredit expects the rating agency will downgrade France's rating was downgraded from Aa3 to A1, a move that would align its rating with those of S&P and Fitch, which have already downgraded the country. Therefore, "it should have a limited impact on French government bonds," says Unicredit.
Special observation is the budget deficit French, one of the highest in the eurozone. The government is trying to reduce it from 5,4% of GDP this year to 5% next year through drastic spending cuts for 54 billion euros. Opposition parties will likely challenge these measures in the coming months, risking bringing down the government. debt French is expected to reach a record level of 119,3% of GDP in 2026, with a projected debt-to-GDP ratio of 121,7% in 2027, the finance ministry said on Saturday. debt stock public is at 2.900 billion.
French banks and companies under scrutiny. Debt servicing costs are rising.
Le consequences pressures on government bonds are having repercussions on banks, businesses and the French state itself. At the end of June, the French banks had already pre-financed 85% of their bond requirement for 2026, aiming to cover that for 2027 by the end of this year. However, a increase in returns of government bonds would end up increase their financing costs and erode valuations: a risk certainly, even if now the banks French, like all the others in the Eurozone, are more capitalized, compared to 2008, and they are more resilient to crises. Also under pressure are the French companies, in particular for those that depend on public procurement or domestic demand, those with the highest level of financial leverage and those whose maturities are concentrated in 2027.
All this also makes it more expensive French debt machine. The debt service costs have already become the largest expenditure item in the French budget, as the country refinances hundreds of billions of debt incurred during the pandemic at extremely low interest rates. The government already expects debt service costs will be higher by 4,5 billion euros compared to this year's forecasts due to rising interest rates, and by an additional 10 billion euros next year. The first indications on the state of French debt should come from Long-term oat auctions scheduled for September and October. “The market's ability to absorb this debt at current yield levels will be assessed on the basis of coverage rates, the quality of demand and the reaction of the secondary market,” said Christophe Herpet, CIO of Ofi Invest AM, who, in the event that France's fiscal or political credibility deteriorates further, sees it. spread to rise to 120-150 basis pointsSuch a scenario would likely lead to an underperformance of French banks, a widening of bond spreads credit-default-swap (CDS) sovereign bonds (at 39,96 on September 21, +1,9% vs. Italy's at 34,36, -0,03%) and an increase in volatility, says the analyst.
