(News Bulletin 247) – For the first time since 2008, the yield on the 10-year French bond exceeded that of the same Spanish bond on the secondary market, according to Reuters.

It is a symbol that shows the extent to which the market has placed France under close surveillance. According to the Reuters agency, the rate of the French 10-year Treasury bond (OAT) briefly exceeded that of the Spanish debt security of the same maturity. According to the agency, this is a first since 2008.

As a reminder, this rate is that of the secondary market, that is to say where investors exchange among themselves the debt securities of a State. Concretely this means that market operators demand a higher yield on French debt than on that of Spain.

Ultimately, the two countries are at very close levels. At 11:40, the yield on the two 10-year debt securities was at 2.98%.

But the dynamics are intriguing. In one year, the rate of the 10-year Spanish loan has moved closer to that of France by around 50 basis points, or half a percentage point.

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Spain’s efforts

This convergence comes at a time when Spain is managing to reduce its public deficit, which fell to just 3.6% of GDP last year and is forecast to reach 3% in 2024. In comparison, France posted a public deficit of 5.5% of GDP in 2023 and the rate is expected to be even higher in 2024.

“Spain has consolidated very well fiscally,” David Zahn of Franklin Templeton told Bloomberg. “More and more people are saying it’s better to buy in Spain than in France,” he added.

Of course, this market symbol also has a lot to do with the political and budgetary uncertainty that has reigned in France since the dissolution of the National Assembly by Emmanuel Macron last June.

The spread between the 10-year German debt security and that of France of the same maturity (the “spread”), a gauge of market confidence in the French signature, was less than 50 basis points before this announcement. It now stands at 78 basis points and slightly exceeded 80 basis points in June.

Uncertainty surrounding the Barnier government

The market remains in a state of expectation as the new Prime Minister, Michel Barnier, named his government on Saturday and his budgetary and fiscal measures are not yet precisely known at this stage. The Matignon tenant indicated that he is considering tax increases targeted at the wealthiest and large companies.

“Uncertainty remains as to the lifespan of this government, which does not have a majority in the National Assembly and will have to rely on the other parties to avoid being overthrown,” Deutsche Bank wrote on Tuesday.

“The new French government is fragile and will have to present its priorities and a budget from the beginning of October, which will not be easy,” commented Xavier Chapard, strategist at LBPAM, on Monday.

“Prime Minister (Michel) Barnier presented his government over the weekend and, given the criticism he has received, some doubt whether he will last,” said Benjamin Schroeder, rate strategist at ING, quoted by Reuters.

In a note published last week, UBS bank estimated that the 10-year spread between France and Germany should continue to evolve between 70 and 80 basis points until there is more clarity on France’s budgetary outlook.

“Investors will remain attentive to the continuity of the budget and the sustainability of long-term debt,” underlines UBS.