(Bloomberg) — Bond investors are set to charge a higher interest rate on French government borrowing for years, in a regime change that could have far-reaching consequences for Europe’s second-largest economy.
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Even if Marine Le Pen’s National Rally party fails to obtain an absolute majority in the upcoming elections, Zurich Insurance and Neuberger Berman say the market will continue to demand a higher return to buy French debt. Others, including Société Générale, expect the political uncertainty that has affected bonds to persist until the 2027 presidential election.
Since President Emmanuel Macron called an early vote earlier this month, the French 10-year bond yield has jumped more than 30 basis points, and is currently hovering around 80 basis points – a level last seen during the euro zone sovereign debt crisis. More than a year. Ten years ago.
“We’re getting a gradual change in the direction France is going in terms of trade compared to Germany,” said Jay Miller, chief market strategist at Zurich Insurance. “I don’t think French bonds will trade again at the level of spread they were in the past.”
The motivations for repricing are twofold. Le Pen’s party, which has a significant lead in opinion polls, has touted some costly budget measures despite growing concerns about France’s debt burden – although it has backed away from some promises in recent days as it seeks more credibility on economic matters.
There is a fear – at least on the margins – that the rise of the far right will lead to a break in relations with the European Union, and may one day pose a challenge to the existence of the eurozone.
Whether French bond yields are likely to stabilize at a higher level has far-reaching consequences for the economy. The French Ministry of Finance estimates that the rise in borrowing rates will cost the state an additional 800 million euros ($859 million) annually. If this level continues, after five years, the additional annual cost will range between €4 billion to €5 billion, and up to €9 billion to €10 billion after 10 years.
Société Générale 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 the presence of a stronger far-right group may complicate the law-making process and stand in the way of reforms.
Adam Corbel, head of interest rate strategy at Société Générale, said that even in the “best-case scenario” for Macron-majority markets, “the premium on French bonds could shrink, but it will not disappear completely.”
He added that in this scenario – which contradicts current opinion polls – the difference between the French and the Germans could shrink, but not less than the range of 50 to 55 basis points, while the victory of the National Rally could witness the difference finding a new balance in the range of 75-55 points. Basis. area to -90 basis points.
“It is possible that the authorities reduce the risk of changing the OAT system,” Corbel said.
The first French bond sale since Macron called early elections this month went ahead as planned on Thursday, a sign that yields are high enough to attract new buyers. The Treasury in Paris raised 10.5 billion euros ($11.3 billion) through auctions of three- to eight-year bonds, which is in line with the high end of the target — although since active dealers tend to be at these sales, the results may not look Necessarily good. It’s all clear.
Extended finances
The election battle highlights the country’s already strained finances. Without further action to control the budget, the IMF said debt will rise to 112% of economic output in 2024, and will increase by about 1.5 percentage points annually in the medium term.
The European Union rebuked France on Wednesday for running a deficit above the bloc’s maximum allowable 3%, and Standard & Poor’s ratings agency downgraded its sovereign credit rating just last month.
“The financial situation is not great,” said Robert Deschner, senior portfolio manager at Neuberger Permam.
The decline in French bonds upends the hierarchy in European debt markets (1)
However, the stabilization of the spread between the French and Germans around current levels is not necessarily a cause for panic, according to Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
“The market is pricing in more risk premium, but we do not expect a full-fledged sovereign crisis,” Ahmed told Bloomberg TV. “A spread between France and Germany at 120 basis points would be worrying, and we are far from that.”
Others predict that the growing momentum is far from over. The Fed Hermes expects the yield gap to rise by 90 basis points before the election, while Capital Economics says 100 basis points could be the new normal.
“There can be a lot of volatility,” said Chris Igoe, chief investment officer at AXA Investment Managers. “It is difficult to see the spread returning to what it was three or four weeks ago.”
-With assistance from Sujata Rao, Naomi Tagitsu, and James Hirai.
(Updates market prices, chart.)
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