French bond yields rose sharply on Monday as news of the political crisis unfolded, according to Hungarian outlet Portfolio.
The current French coalition government is expected to fall after opposition parties turned away from a confidence vote called by the prime minister in September, and its high deficit and debt have triggered a major bond sell-off. Investors are already pricing in country risk that is higher than Portugal and Greece, but only 10 basis points lower than Italy, making fiscal consolidation increasingly inevitable.
The markets in France also moved on the news of the government crisis that unfolded on Monday. We have previously reported on the stock market drop, but the bond market was not left out, which also plummeted due to the events.
French Prime Minister François Bayrou announced on Monday that he will seek a vote of confidence from parliament on Sept. 8 after his minority government seeks to achieve savings of nearly €44 billion in the 2026 budget. However, the government’s future is in serious jeopardy as the largest opposition parties — including the National Rally, the Greens, La France Insoumise, and the Socialists — have publicly announced that they will vote against the prime minister.
Bayrou warned that France was “in danger” as the country teetered on the brink of excessive debt. The government presented its 2026 budget on July 15, which aims to reduce public debt, which now stands at 113 percent of GDP — one of the highest in the European Union. France also has a significant budget deficit of 5.8 percent, also among the highest in the EU.
The French government bond market moved sharply on the news of the confidence vote and the opposition parties’ announcement. The benchmark 10-year bond yield rose 8 basis points on Monday and is currently at its highest level since mid-March (after another 3 basis point increase, it is now at 3.52 percent). The last time it did so was in November 2011.
At the same time, the premium of French bond yields over German ones rose to 77 basis points, also a nearly six-month high.
All this clearly reflects the sudden increase in French country risk.
According to Andrea Tueni, head trader at Saxo Banque France, “The markets are clearly reacting to the political crisis, which is also accompanied by serious economic uncertainty.”
The French government crisis has also shaken the currency markets. The dollar weakened after Jerome Powell’s Jackson Hole speech last week, suggesting a rate cut, but on Monday it strengthened by nearly 1 percent against the euro. Yesterday’s and today’s exchange rate data are more indicative of a market correction and another attack on the Fed’s independence.
Thomas Zlowodzki, a strategic analyst at Oddo BHF, said the French prime minister’s request for a vote of confidence was a particularly risky move, as the September vote could easily bury the minority coalition government. Bond investors share the concerns, as after Monday-Tuesday’s sell-off (which pushed prices down and yields up), French yields have already surpassed those of historically risky countries such as Portugal or Greece.
“The next step is to surpass Italian yields, but that would be a very serious milestone,” Tueni stated. This would require another 10 basis points increase.
According to Nour Al Ali, a strategic analyst at Bloomberg, the current political crisis is eroding the traditionally dominant status of French government bonds, and the austerity measures that are dividing parliament are currently holding both bond and stock markets in a bind.
French stock prices began to fall on news of the unfolding political crisis, and the stock index of the largest companies fell by about 2.2 percent in the first two days of the week.
According to Vincent Juvyns, chief investment strategist at ING Bank in Brussels, a very interesting situation has arisen in Europe at the moment, as there is now only one country, Germany, that is clearly able and willing to spend more than before. Meanwhile, for the others, budget consolidation is becoming increasingly urgent.
