New data has suggested that the yields on 10-year French bonds rose for the first time above those of their Spanish equivalents for the first time in over 15 years.
According to Euro News, this is an indicator that investor confidence within France is declining. The same report states that yields on French bonds already stand above these of Portuguese bonds.
Mathieu Savary, chief strategist, European Investment Strategy, BCA Research, told Euro News: “Due to the election’s results, investors now fully realise that France’s fiscal quagmire will not be meaningfully addressed. Hence, they are now pricing Spanish and French instruments on growth and fiscal fundamentals, which means that French bonds warrant a comparable risk premium to Spanish ones.”
The news comes following months of political tumult in France, with President Macron calling a snap election that saw his party decimated. This was followed by weeks and months of wrangling over the appointment by Macron of a new Prime Minister. That tension came to a head with the appointment of Michel Barnier in early September.
None of this has bred confidence in investors.
Over on Reuters, Yoruk Bahceli and Belén Carreño laid out four reasons why investors are now beginning to favour Spanish bonds over their French equivalent. Alongside the higher yields, the pair said that other contributing factors were the country’s budget deficit, soon to hit 6% of GDP, or double that allowed by the European Union; booming growth in Spain from a labour market boosted by immigration and tourism; and lower ratings for Spain by S&P Global, Moody’s, and Fitch.
France has also been troubled in recent weeks by the late unveiling of the government’s new budget.
As ING wrote earlier this week: “[…] new government estimates indicate that the public deficit – forecast at the start of the year at 4.4% and already revised upwards in April – should exceed 6% of GDP this year after 5.5% in 2023. This is a huge budgetary blow, which the government believes must be blamed on lower-than-expected tax revenues, against a backdrop of economic growth driven by exports rather than domestic consumption which has generated lower VAT receipts.”
It added: “According to the Treasury, if no corrective measures are taken, the deficit should reach 6.2% in 2025, 6.7% in 2026 and 6.5% in 2027. Reaching the 3% target that France has promised its European partners in 2027 would require savings of €110bn between now and 2027, an effort that has never been made in France (and is virtually impossible).”
