France's Political Turmoil Sends Bond Yields Soaring

France's 10-year government bond yield surged to its highest since November, driven by political instability following a snap election called by President Emmanuel Macron. Analysts express concerns about fiscal policies under potential new administration. The bond yield gap between France and Germany widens, indicating increased investor anxiety.

Reuters | Updated: 11-06-2024 15:48 IST | Created: 11-06-2024 15:48 IST
France's Political Turmoil Sends Bond Yields Soaring
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France's 10-year government bond yield climbed to its highest since November on Tuesday, rising for a second day, after the French president called a snap vote following a surge in support for the far-right in European Parliament elections. France's 10-year bond yield jumped 6.5 basis points (bps) to 3.304% after surging 12 bps a day earlier, its biggest one-day jump in 11 months as the new election raised concerns about already fragile public finances, analysts said.

President Emmanuel Macron called the snap legislative election after heavy losses to Marine Le Pen's National Rally in the European Parliament election over the weekend. Le Pen's far-right party would win a snap election but fall short of an absolute majority, according to a first opinion poll held since Macron called the vote.

"Markets are worried that the possible next government will not stick to fiscal consolidation," said Sophia Oertmann, analyst for EMU government bonds at DZ Bank. Ratings agency Moody's warned that France's elections were negative for the credit score, and the current 'stable' outlook could be cut to 'negative' if debt metrics worsen.

With Germany's bond yields falling slightly, the gap between French and German 10-year yields, a measure of the premium investors require to hold French debt over German, rose to almost 65 bps, its widest since October last year. But that remains far below the 80 bps reached in 2017 when Le Pen, now less euroscpetic, vowed to leave the euro if elected during the French presidential election.

"It now also appears reasonable that the political news out of France and the release of opinion polls might lead to spikes in volatility in EGB (European government bond) spreads at any time," analysts at UniCredit said in a note. Germany's 10-year yield, the euro area benchmark, was last down 1.5 bps at 2.661%, with markets keeping a close eye on events in the U.S. this week, with inflation and a Federal Reserve policy announcement both on Wednesday.

"We've had yesterday and today to digest the results of the European elections but I would expect the market attention to come back to monetary policy and inflation from tomorrow onwards," DZ Bank's Oertmann said, describing the two data points as being the top influences for the market. The ECB cut interest rates for the first time in five years last week, but President Christine Lagarde said on Monday the central bank could wait several meetings between rate cuts, pouring cold water on a possible cut in July.

Italy's 10-year yield, the benchmark for more indebted countries of the euro zone, was up 4.5 bps at 4.125%, pushing the Italian-German 10-year yield gap to 144 bps, its widest in three months.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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