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France, government bonds under pressure, Oat/bund spread at 80 basis points: eyes on the actions of the new government

For the French, fear is 80: this is the key threshold on which the differential with Germany has returned, even higher than that of the Spanish, on the perplexities linked to the new government. The Btp/bund spread is little affected

France, government bonds under pressure, Oat/bund spread at 80 basis points: eyes on the actions of the new government

I French government bonds are under pressure again, with investors wondering whether the new government it will be quite effective on the public accounts in difficulty and above all on how long he will be able to stay in the saddle.

The risk premium over German debt, measured by the spread between the yield on the 10-year OAT and its closely watched namesake Bund, has returned to the neighborhood of key threshold of 80 basis points, the highest level since early August, revising the highest levels since the eurozone debt crisis of 2017. This summer it had exceeded 85 basis points.

I French government bonds Furthermore, for the first time since 2008, they showed higher yields yesterday than those Spanish (the bond/bund spread is at 79 basis points this morning) another sign that investors are no longer willing to ignore the difficulties of French public finances, as fiscal and political factors damage sentiment towards the second largest economy in the eurozone. The tensions of the French are not affecting Italian government bonds much for now: this morning the spread widened to 131 basis points from 130 bps at yesterday's close.

French bonds tied to government moves on public accounts

The performance of French bonds it will depend on the budget of the country, which will test the duration of the government. The government appointed two and a half months later early elections, has the difficult task of making approve the reforms and the budget 2025 from a divided parliament. “The big question is: How long will this government exist?” Michael Krautzberger, head of fixed income investments at Allianz Global Investors, told Reuters.

France's new finance and budget ministers said they would focus budget tightening first and foremost on spending cuts and then on the tax increases, as the new government faces demands to come up with realistic plans to curb a fiscal deficit that threatens to balloon. The prime minister Michel Barnier must complete the 2025 budget within a few days and deliver it to legislators no later than mid-OctoberBudget Minister Laurent Saint-Martin said just days ago that the hole in public finances was worse than expected, with the budget deficit at risk of exceeding 6% of economic output, well above the 5,1% estimated by the previous government in the spring.

“I wouldn’t touch French government debt for the moment. There is too much uncertainty,” Francois Savary, chief investment officer at Genvil Wealth Management, told Reuters.

The acid test will be Moodys' judgment at the end of October

Moody's is expected to review the rating on October 25: the rating agency had stressed that the worsening of the debt parameters could lead to a downgrade of the outlook of its Aa2 rating on the country, which is one notch above the equivalent score of Fitch and S&P Global, and lead to negative. "A weakening of the commitment to fiscal consolidation would also increase downward pressure on credit," Moody's said when Macron called the new elections.

French stocks on the stock exchange are also suffering from political uncertainty, especially banking stocks

Le French stocks have risen just over 2% since the new government was announced last week, broadly in line with the European STOXX 600 index. However, overall performance since French President Emmanuel Macron's decision on June 9 to call early elections remains disappointing and analysts are not hopeful of a recovery any time soon.

The CAC 40 index in Paris has lost about 4% since then, while the German DAX has risen about 3% and the STOXX 600 has lost just 0,3%. The underperformance is even more pronounced for French stocks at mid-cap focused on the domestic market, which are down nearly 8%. “French equities have performed poorly since the appointment of the new government, probably because its sustainability remains questionable,” said Frederique Carrier, head of investment strategy at RBC Wealth Management.

In particular the actions of the French banks, which were hit hard in June, remain below levels recorded before Macron's announcement of early elections. Societe Generale, BNP Paribas e Crédit Agricole, France’s three largest banks, have fallen between 5% and 13% since then, compared with a European banking index that has risen about 1,5% over the same period. “Macroeconomic and political uncertainty creates downside risk for French banks and could last for months, but we expect French bank profits to rebound in 2026,” Bocahut said, citing factors such as cost-cutting measures.

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