French bond yield surpasses Spain’s as investors mull budget woes

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For the first time since the 2008 financial crisis, the yield on 10-year French bonds traded slightly above the Spanish equivalent for a brief period, at 2.97% on Thursday, according to LSEG data.

Spanish bonds are traditionally seen as a riskier investment than French ones.

The rising premium to hold French debt, already higher than Portugal’s, shows waning investor confidence as Europe’s second biggest economy faces pressure to present a budget, as well as long-term solutions to fix its mounting debt. 

“Due to the election’s results, investors now fully realise that France’s fiscal quagmire will not be meaningfully addressed,” said Mathieu Savary, Chief Strategist, European Investment Strategy, BCA Research.

“Hence, they are now pricing Spanish and French instruments on growth and fiscal fundamentals, which means that French bonds warrant a comparable risk premium to Spanish ones.”

Prime Minister Michel Barnier’s new government struggles amidst political turmoil to close a gaping hole in the budget as the public deficit is expected to exceed 6% of GDP this year, levels not seen since 1945, apart from the financial crisis of 2008 and covid in 2020. 

Swelling further investors’ doubts that France will be able to present a budget mandated by the EU, the French government is requesting more time from the European Commission to submit its plan for meeting the EU’s fiscal rules.

In 2023, France struggled to keep its finances at bay, presenting a high deficit of 5.5% of the GDP. The European Union requires that to be tamed to 3% by 2027.

PM Barnier is going to present the government’s budget to the parliament on the 1 October.

Meanwhile, Spain is showing promising signs of raising investors’ trust, with the Bank of Spain recently raising its growth forecast for this year by 0.5% to 2.8%. However, the country’s debt decreased in July in a monthly comparison.