We have to go back 16 years to see the last time that on the secondary market (where the debt is listed after its issuance) the same profitability was required for the Spanish 10-year bond as for the French bond, which is close at that time, which differ by barely 15 basis points. Added to the good evolution of the Spanish debt are doubts about the French debt, especially after the last elections, which left a very fragmented French Parliament and in which Emmanuel Macron was able to form an a priori unstable government that adds to the concerns. about the budget deficit.
And the market is clearly positioning itself in an environment of greater uncertainty in France, which weighs more on investors than the trajectory of rate cuts started in June by the European Central Bank (ECB) in favor of rates. The risk premium, measured as the difference in required return between its 10-year bond and its German counterpart, rose to 80 points, its highest level since August. “This is a premium because of the political situation,” they emphasize at TD Markets. Similarly, the latest activity data from Services was particularly bad after the rebound linked to the Olympic Games.
The French ten-year bond is evolving around a yield of 2.96%compared to the 2.55% with which the year began. However, during the summer it rose to 3.346%. French debt also benefited from the July highs thanks to the environment of lower rates that the market integrated, which allowed profitability to relax (price increases). But last week there was a clear rebound, with an increase of around 15 basis points, which brings it closer to 2.975% of Spanish securities.
From Bankinter, they comment that Prime Minister Michel Barnier stressed in an interview [este domingo] that the budgetary situation is “very serious”. With most of the French debt being issued on international markets, he stressed that “France’s credibility must be preserved”. The bank’s analysts recall that “the public deficit in 2023 amounted to 5.5% of GDP and the Treasury has already indicated that France will end this year with a deficit of 5.6%far from the EMU target of 3%. “France has been subject to the EC’s excessive deficit procedure since last July.”
“France to record second largest budget deficit in Eurozone“, after Slovakia (5.9% of GDP), and well above the 3% Maastricht threshold,” they point out in Scope Ratings. “France’s membership of the G7, its capacity for economic recovery, its weight in European governance and its solid institutional strength have so far mitigated concerns about the country’s successive government budget deficits. However, despite the economic recovery from the pandemic, the increased political uncertainty since the early elections in June has been combined with the deterioration of the budgetary outlook,” the firm believes.
Credit rating agencies have also already given it a rating touch. S&P lowered the rating of the French Republic on May 31st, until AA–, after having placed its outlook at “negative” at the end of 2022. Fitch places it in this same stage, while Moody’s still maintains a rating Aa2equivalent to a higher level. However, it should not be forgotten that Spain, like other countries on the European periphery towards which it is beginning to establish itself, look like France has an even worse credit rating. The Kingdom of Spain has a HAS by S&P, for example; It’s two steps lower.
What is becoming increasingly clear is that investors are separating France from other countries it used to be equal to, such as Belgium or Ireland. Belgian 10-year bonds are around 2.8% while Irish bonds are around 2.5%. If investors start demanding less profitability from Spain than from France, it will not be the first time that a peripheral country has succeeded; Portugal’s debt is at 2.73%.
