The French bond market between uncertainty and stability

A certain stability returned to the French bond markets on Wednesday, while Prime Minister Michel Barnier's government faced a looming no-confidence vote. The yields on 10-year government bonds showed little movement, and the benchmark index of the French stock exchange recorded moderate gains. This occurred ahead of the debate on the motion to overthrow the government, which is set to begin at 4 p.m. Paris time, followed by the vote. The background to these political tensions is the support Marine Le Pen's right-wing party threatened to give to the no-confidence vote should Barnier's government not consider their budget demands. In this highly dynamic political landscape, the yield on French 10-year bonds rose to 90 basis points above the more secure German papers – a level last seen during the euro debt crisis. Meanwhile, the risk premium decreased to 83 basis points on Wednesday. Guy Miller, Chief Market Strategist at Zurich Insurance, noted that many risks are already priced in. Nevertheless, the market remains nervous, and there is a risk that risk premiums will rise rather than fall if this phase persists and potentially extends into the next year. Some investors predict that the risk premium on French bonds could rise to 100 basis points if the government were to fall. Barnier warned of a "storm" on the financial markets in the event of his removal. President Emmanuel Macron appealed to the assembled deputies to set aside their personal ambitions and reject the vote. Nevertheless, the motion is expected to pass if it is supported by both Le Pen's National Rally and a left-wing alliance. A collapse of the government so close to the end of the year would steer France into unpredictable waters, with economic and financial repercussions that are difficult to assess. Rabobank strategists led by Richard McGuire expressed in a client note the expectation that the government will lose the vote. They continue to advocate for the sale of French bonds in favor of Spanish and Italian papers.