by Stefano Rebaudo
(Reuters) – The risk premium required by investors to hold French debt rather than German Bunds fell on Thursday, despite the fall of Michel Barnier’s government, the market having already priced in political instability in France, according to analysts .
The outgoing French Prime Minister must present his resignation to the President of the Republic this Thursday, the government having been overthrown on Wednesday by a motion of censure, an unprecedented event since 1962 which opens a new period of major political uncertainty, six months after the dissolution of the National Assembly.
The spread between French and German 10-year yields, a measure of the premium investors demand to hold French debt, narrowed to around 80 basis points (bps) after reaching 90 bps on Monday, its level the highest since 2012.
Considering the price action of the previous days, market operators say they expect a moderate reaction, or even a “buy the rumor, sell the news” type reaction.
According to analysts, France will enter a slow-burning crisis that could lead to a further deterioration of its debt solvency and weak economic growth.
They recalled that in the finance bill, the government was targeting 60 billion euros in spending cuts and tax increases to reduce the deficit to 5.1% of gross domestic product (GDP) in 2025.
“In the end, the very probable extension of the 2024 budget to 2025 implies a budgetary policy that is less restrictive than expected in terms of tax revenue and consistent with what was planned in terms of public spending,” writes Charlotte de Montpellier, economist at ING.
Eurozone borrowing costs rose slightly on Thursday before the publication of US employment data on Friday which could affect the outlook for the US Federal Reserve’s (Fed) monetary easing path.
The yield on the ten-year German Bund, the benchmark for the euro zone, rose 2.1 bp, to 2.076%, compared to 2.033% last week, its lowest level since the beginning of October.
Fed Chairman Jerome Powell said Wednesday that the U.S. economy appears stronger than it appeared in September, which could prompt the central bank to be more cautious in its next rate cuts .
“While US Treasuries stabilized late afternoon (Wednesday) following the disappointment in the ISM services index and weakening labor market indicators, the valuation of “the euro is starting to get tense ahead of the European Central Bank’s likely 25 basis point rate cut next week,” notes Hauke Siemssen, rates strategist at Commerzbank.
The euro is trading at $1.0530, not far from the two-year low reached at the end of November, at $1.0332.
(Reporting Stefano Rebaudo; Claude Chendjou, editing by Kate Entringer)
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