French Bond Yields Surge Amid Macron's Snap Election Announcement

Key Takeaway

• French 10-year bond yields surged to 3.18%, widening the spread with German bonds to 53 basis points, amid snap election concerns.
• The CAC 40 index dropped by 2.4%, and major French bank shares fell up to 9% following Macron's election announcement.
• The euro weakened by 0.5% to $1.0748, reflecting market jitters over potential political instability and economic reforms in France.

French Bond Yields Surge

French government bonds experienced a significant sell-off on Monday following President Emmanuel Macron's announcement of a snap election. The yield on the 10-year French note rose by eight basis points to 3.18%, nearing its highest level this year. The spread between French and German 10-year bonds widened to 53 basis points, the largest gap since January. This move reflects investor concerns about Macron's ability to pass legislation, especially after a recent defeat in the European Parliament election and a credit downgrade by S&P Global Ratings.

"The recent downgrade of the French sovereign rating could lead investors to question the capacity of European governments to support the economic recovery," said Theophile Legrand, a rates strategist at Natixis SA. He added that the yield premium on French 10-year bonds over Germany might widen further to 55 basis points.

Market Reactions

The announcement of the snap election had a ripple effect across various financial markets. The CAC 40 equity index in Paris dropped by 2.4%, with shares in major French banks falling by as much as 9%. The euro also fell by as much as 0.5% to $1.0748, its weakest level in a month. This decline in the euro pares an almost 2% rally since mid-April, as traders had been betting on European Central Bank rate cuts this year.

"Macron called for French elections, which would be negative for French spreads as a right-wing majority in the Parliament would hamper any reform plans. The deficit picture in France is already weak, and this would further add to market concerns," said Mohit Kumar, chief economist and strategist for Europe at Jefferies.

Analyst Perspectives

Analysts have mixed views on the impact of the snap election on French and European markets. Vincent Mortier, chief investment officer at Amundi, stated, "Markets will be prudent but not panicked. French stocks will likely underperform European peers to some extent, and the spread between yields on French and German sovereign debt could widen modestly. There will, of course, be an impact. But from my point of view, it won’t be a major one."

Sonja Marten, head of FX and monetary policy research at DZ Bank, commented, "Should the election in France result in a win for Le Pen and should this add to strife within the Eurozone, then yes, I think this will impact the Euro negatively. But for that to translate into less rate cuts from the ECB, the depreciation of the Euro would have to be quite pronounced."

Street Views

• Theophile Legrand, Natixis SA (Bearish on French government bonds):

  "The recent downgrade of the French sovereign rating could lead investors to question the capacity of European governments to support the economic recovery... The yield premium on French 10-year bonds over Germany may widen further to 55 basis points."