The bond market is under scrutiny in France as the 10-year OAT/Bund spread has spiked amid political uncertainties fueled by President Emmanuel Macron’s decision to initiate early legislative elections, following his party’s heavy defeat in the European elections. Polls indicate that President Macron’s alliance is unlikely to triumph in the upcoming parliamentary elections, setting the stage for a confrontation between far-right and left-wing factions. A hung parliament appears likely, with the far-right “Rassemblement National” (RN) possibly securing the most seats but falling short of a majority. This uncertainty troubles investors who are concerned about France’s fiscal and debt situation.
10-year French OAT Yield Steady, 10-Year Bund Yield down 26 bps
The yield on France’s 10-year OAT (“Obligations Assimilables du Trésor”) was steady week-over-week (up 1 basis point from 3.10% to 3.11%), after reaching 3.24% on Tuesday. By contrast, the 10-year German bund yield fell by 26 basis points, thereby pushing the OAT/Bund spread, a key measure of market sentiment, to 75 basis points, a level not seen since February 2017 and the biggest weekly surge on record.
French Debt at the Same Rate as Portuguese Debt
It is also interesting to note that the yield on the 10-year OAT is now almost aligned with that of the Portuguese government bond (3.15%), even though Portugal has become one of the most attractive countries in Europe. This country was on the brink of bankruptcy ten years ago.