

Market Analysis
The recent turbulence in France's bond market could signify a new phase for the euro zone's wealthiest economies, as emerging political and fiscal uncertainties increase volatility previously associated with high-debt members like Greece and Spain.
French President Emmanuel Macron surprised markets on June 9 by calling for snap elections following significant gains by far-right parties in European parliamentary elections.
Currently, French government bond yields stand at approximately 3.25%, close to their highest level this year. This has widened their spread over German yields, the European benchmark, to the largest since at least 2017, reflecting investor demand for higher returns on French debt.
France, along with Belgium, now faces European Union sanctions over its budget deficit, contrasting with Spain, Portugal, and Greece, which have adhered to stricter debt reduction rules since the euro zone sovereign debt crisis.
The distinction between the euro zone's "core" (wealthier northern countries) and "periphery" (southern countries with historically higher debt) has evolved. While peripheral countries have seen reduced yield spreads, core members like France have experienced widening spreads, suggesting increased market volatility.
"We anticipate French government bonds will increasingly resemble peripheral rather than core assets," noted Felix Feather, economist at abrdn. This shift indicates potentially greater volatility and wider spreads compared to Germany.
Since Macron's announcement, the spread between French and German 10-year yields spiked to 82 basis points, prompting concerns of a deeper crisis. It currently stands at 77 basis points, higher than core members Belgium (64 bps), Austria (56 bps), and the Netherlands (33 bps).
Investor preference for higher-yielding assets has helped stabilize Spain, Portugal, and Greece, despite an inverted yield curve where long-dated bonds yield less than shorter ones.
Political uncertainties, particularly with Marine Le Pen's National Rally leading in polls, raise concerns about France's fiscal path. Analysts differ on whether a far-right or far-left government could widen the yield spread further, potentially reaching levels seen in Italy.
Despite these challenges, analysts believe France's liquidity and status as a global safe asset will likely keep its yield spread versus Germany narrower than that of Spain and Portugal in the long run.
Paraphrasing text from "Reuters" all rights reserved by the original author.