French Bonds Tumble Amid Macron's Snap Election Announcement

Key Takeaway

• French 10-year bond yields rose to 3.27%, widening the spread over German bonds to 63 basis points, amid political uncertainty.
• Macron's snap election has unsettled markets, causing the CAC 40 index to drop 2.4% and major French bank shares to fall by up to 9%.
• S&P Global Ratings downgraded France's credit score due to fiscal concerns, with a budget deficit expected above 3% of GDP through 2027.

French Bonds Tumble

French bonds experienced a significant sell-off on Tuesday following President Emmanuel Macron's decision to call a snap election, which has unsettled investor confidence in the French economy. The yield on 10-year French government securities increased by five basis points to 3.27%, marking the highest spread over equivalent German bonds since October, at 63 basis points. This move reflects growing concerns among investors about the potential impact of the upcoming election on Macron's economic policies, which have been a cornerstone of his administration since 2017.

The snap election, scheduled for later this month, is seen as a critical juncture for Macron's pro-business agenda. The president's policies have generally reassured investors and businesses, but the current political uncertainty is causing jitters in the market. "Macron is taking a chance with domestic policy, which could backfire, leading to stalling of reform efforts," said David Chappell, a senior fund manager at Columbia Threadneedle Investments.

Market Reactions

The political turmoil in France has had a ripple effect on European markets. The euro edged lower on Tuesday, following a decline to its weakest level in a month on Monday. The benchmark stock index weakened for the third consecutive day, and French bonds traded at their highest yield compared to German debt since October. The CAC 40 equity index in Paris dropped 2.4%, with shares in major French banks falling by as much as 9%.

In the broader European context, regional markets are also feeling the impact of the European Parliament election. Macron's call for a legislative vote is seen as an attempt to halt the advance of his far-right rivals. The election is expected to be a showdown over Macron's economic policies, which have been under scrutiny since he took office. "A right-wing majority in the Parliament would hamper any reform plans," said Mohit Kumar, chief economist for Europe at Jefferies International.

Fiscal Concerns

The snap election has intensified focus on France's fiscal challenges. Last month, S&P Global Ratings downgraded France's credit score, citing a budget deficit that is expected to remain above 3% of GDP through 2027. The French fiscal watchdog has criticized the government's deficit strategy for lacking coherence and credibility, while the International Monetary Fund has called for "substantial" additional efforts to address the fiscal situation.

The political uncertainty has also affected the euro, which fell as much as 0.6% to $1.0733 on Monday, its weakest level in a month. The move reverses an almost 2% rally since mid-April, as traders have increased bets on European Central Bank rate cuts this year. "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.