PARIS (Reuters) – The risk premium on French assets is increasing with political uncertainty but the market’s perception is more nuanced and a stock market panic is not a plausible scenario, several analysts temper.

The expected censorship from the Michel Barnier government caused the yield gap (or risk premium, “spread”) between the 10-year OAT and its German counterpart to rebound at the end of November to a 12-year record, at 90 basis points (bp).

More broadly, “the possibility of a stock market panic is fanciful,” summarizes Christopher Dembik, investment strategy advisor at Pictet AM.

The yield on 10-year French debt continues to fall, showing Monday at 2.92% – far from its record this year reached on July 1, at 3.349%. Weak economic data is encouraging investors to anticipate more monetary easing from the European Central Bank (ECB), which supports bond assets.

Furthermore, the yield gap has not widened on maturities of less than 10 years, and has even fallen slightly for French debt issued at 2 years, suggesting that the markets do not fear an immediate collapse but are rather worry about the long-term budgetary outlook.

Demand finally remains solid: the last issue of 10-year securities, on November 25, was oversubscribed 2.8 times, according to LSEG data, compared to 2.5 times on average this year.

ALARMISM

This disconnect between market reaction and the evolution of French sovereigns this year is explained firstly by the specificities of the French political system.

“There are a lot of difficulties on the part of certain investors in understanding how the French Constitution works,” notes Claudia Panseri, head of investments at UBS Wealth Management France.

Despite its prudence, the ECB has not remained blind to movements in French yield since June 9, when the National Assembly was dissolved.

“The ECB took advantage of the flexibility offered in the reinvestments of its asset purchase programs to buy French debt this summer”, putting downward pressure on yields, adds Axel Botte, director of market strategy at Ostrum AM.

Between June and September, the ECB purchased 2.5 billion French securities and reduced its holdings of sovereigns from other member countries.

The liquidity and depth of the French debt market also works in its favor: the volumes of debt issued by Berlin remain insufficient in the face of investor demand, who historically fall back on OATs.

If arbitrations have taken place since this summer, in favor of Spain or Italy in particular, investors remain sensitive to the levels of yield on French securities, and which could become attractive in relation to the economic fundamentals of France.

“The market is underexposed to the OAT and a widening of the ‘spread’ to 100 basis points could trigger a return of investors,” agrees Matthieu de Clermont, director of insurance investments & regulatory strategies at Allianz.

France finally has a base of solid institutional domestic investors and households with high savings rates.

“This is what was missing in Spain or Portugal at the time of the peripheral crisis 15 years ago: domestic banks were in poor condition and institutional investors were too weak to replace foreign players,” summarizes Gilles Moëc , chief economist of Axa in a note.

MEDIUM TERM

The market situation should, paradoxically, simplify the government’s work, because the spread of rates does not translate into tougher borrowing conditions.

“The government relies on forward curves (derivative contracts) to build its emission hypotheses for 2025, but these do not show an increase in borrowing costs for 2025,” notes Axel Botte.

Furthermore, both the European Commission and the S&P Global Ratings rating agency believe that the French government will succeed in complying with the European budgetary framework, with the agency recalling that “despite the current political instability, we expect France to (…) gradually consolidates its public finances in the medium term.

The risks on French debt therefore remain less political than economic.

“Political uncertainty is here to stay, in the absence of a clear majority in the National Assembly. And the economic situation is suffering,” underlines Claudia Panseri. Household and business confidence would bring French growth to 0.8% in 2025, calculates the manager, compared to 1.1% projected by the government.

Lower growth linked to a more prolonged wait-and-see attitude would mechanically degrade debt/GDP ratios and fuel concerns about the debt, whether political voluntarism or not.

(Written by Corentin Chappron, edited by Kate Entringer)

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