(News Bulletin 247) – The yield on France’s 10-year debt security is easing marginally on the secondary market, while the gap with that of the bond of the same maturity with Germany is increasing slightly.

If the downgrading of France’s credit rating by the S&P agency certainly constitutes a political setback for the executive, one week before the European elections, the market is hardly moved by this decision.

This Monday morning, the yield (a measure of borrowing cost) of France’s 10-year bond on the secondary market is almost unchanged, standing at 3.104% compared to 3.130% Friday evening, before the announcement of the decision of the American rating agency.

One way to measure the degree of market “stress” on the sovereign debt of a European country is to compare the yield on the 10-year debt security of this country with that of Germany, a reference country because it is very virtuous in public finance matters. This is what we call the “spread”. The more this spread grows, the more the stress increases.

This Monday, the spread between the yield on French and German 10-year bonds stood at just over 47 basis points (0.47 percentage points) compared to 46 points on Friday. Nothing dantesque since this gap has regularly exceeded 50 basis points in 2024, and stood at 54.7 basis points at the beginning of January, according to data from investing.com.

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“No notable impact”

Late Friday evening, S&P lowered France’s credit rating by one notch, from “AA” to “AA-“, the fourth highest rating for an issuer in its ranking. Which amounts somewhat to aligning with the rating assigned by Fitch, which had downgraded France to “AA-” in April 2023. Moody’s is now the most “generous” agency with France since it assigns it a grade of “Aa2”, the third highest in its nomenclature.

S&P’s decision should not “have a notable impact on French short-term interest rates given that this deterioration was largely expected (S&P had a negative outlook for a long time), that this aligns France’s rating with that of the Fitch agency (the Moody’s agency maintains a rating one notch higher) and that France’s rating remains high”, explains Xavier Chapard, strategist at LBPAM.

“But this confirms the trend deterioration of France’s public finances and the need for significant budgetary adjustment. With the probable defeat of the government in the European elections and the announcement of an excessive deficit procedure against France expected this summer, we “Let us remain cautious on French debt in the medium term and prefer the debts of southern countries,” he adds.

“The deterioration of a notch (of one notch in France, editor’s note) will have no effect on the level of long-term interest rates. Demand for European assets is still high and Germany has nothing left to sell”, Philippe Waechter, chief economist at Ostrum Asset Management, wrote on X (ex-Twitter).

Broadcasts well received since the start of the year

Since the start of the year, several sovereign debt issues from euro zone countries (such as Belgium or France) have been well received, with investors buying the papers of these countries, unable to acquire German debt in their wallet.

In January the euro zone issued 200 billion euros worth of bonds, a one-month record according to Barclays cited by the Financial Times. “The market continues to show a surprising appetite for absorbing European government bonds, which is largely explained by the change in the macroeconomic outlook,” said Rohan Khanna, head of rates strategy at interest in euros at Barclays, cited by the British daily.

In April, economists at Pictet Wealth Management judged that despite the risk of French public finances slipping, the rise in French bond yields should remain very contained.

“While a possible lowering of France’s sovereign ratings in the coming weeks could lead to a further widening of spreads, we are maintaining our end-of-year spread of 60 basis points for French 10-year bonds,” explained the bank.