French government bonds are increasingly similar to Italian ones

The yield on France's 10-year government bond hit 3.40% on the morning of Thursday, January 9, its highest level since 2011, before falling to 3.38%. Yield has increased 20 basis points since the beginning of the year. “The burden of interest will soon weigh more than the budget of national education,” warned the governor of the Banque de France François Villeroy de Galhau on Wednesday evening, during the New Year greetings in the presence of the new Minister of Economy, Eric Lombard .

The reasons for this sudden increase in French interest rates are multiple. First, it is part of a general upward movement in long-term sovereign rates, the main driver of which is the increase in US long-term rates. In four months, the US 10-year bond has risen 90 basis points to around 4.6%, with the 5% threshold within reach. However, here is the trend of interest on the French 10-year OAT :

To be precise, France fared badly, but even a little better than the UK

Devaluation of the Pound and Euro against the Dollar on the left, and French and British bond yields on the right

This increase was fueled both by Donald Trump's economic program , considered inflationary, and by the more hawkish (monetary tightening) stance of the US Federal Reserve. At the same time, the UK 10-year yield also rose towards 5%, to 4.8%, an absolute level higher than that reached during the Gilt crisis in September 2022. That crisis led to the intervention of the Bank of England and the resignation of Liz Truss's government. This new fever should force the Labor government to adopt a tougher fiscal policy in the future.

However, these are only partial explanations and the ECB has its own huge responsibilities. In the eurozone, the European Central Bank has completely stopped buying bonds on the financial markets since January 1st, a policy ( quantitative easing ) that it has gradually stopped over the last two years. So far the market has easily absorbed the supply of paper, both public and private, in place of the ECB. On the other hand, investors will need to have enough appetite to buy the approximately 300 billion euros of French debt in 2025, in addition to other public and private issues (nearly 1 trillion euros expected in 2025).

The fact that the ECB no longer intervenes by buying securities and stabilizing the market also leaves it prey to political fluctuations. Both France and the United Kingdom are facing strong instability, with the Bayrou government being a minority and the Starmer government embroiled in controversy over the Grooming Gang, so any political fact, at least temporarily, has an impact on the market. But it is natural and without a Central Bank we are a ship in a stormy sea.

Finally, the budget delay in France, not to mention the possibility of a partial reversal of pension reform – a nightmare for bond managers – has once again pushed the risk premium on French debt to 86 basis points. This brings it back to the highs of early December 2024, a far cry from the 50 basis points seen before the announcement of the dissolution of the National Assembly last June. In other words, the yield is moving further and further away from that of Germany and closer and closer to that of Italy.

The article French government bonds are increasingly similar to Italian ones comes from Scenari Economici .

This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/i-titoli-di-stato-francesi-sono-sempre-piu-simili-a-quelli-italiani/ on Fri, 10 Jan 2025 16:47:40 +0000.