The risk premium that investors demand for French ten-year bonds compared to the German 'bund' soared this Thursday above 160 basis points, reaching its highest level since November 2011. This spike comes after the yield on the country's ten-year bond has clearly surpassed the 5% threshold, raising the cost of financing for the French Treasury to its highest since 2002.
Specifically, in the secondary market, the interest on the French ten-year sovereign bond touched 5.064%, which represents a differential of 166 basis points compared to the yield demanded for the German bond of the same time reference.
The selling pressure on French debt has intensified in recent weeks in line with the rising cost of oil, which led the European Central Bank (ECB) to tighten its monetary policy in September. This context has increased investors' doubts about the sustainability of French public accounts, in an already tense environment following the weekend disturbances, which threaten to hinder the progress of fiscal consolidation measures, and while awaiting the imminent pronouncement from Moody's on France's debt rating.
In this context, although the yield on the French ten-year bond initially found some barrier around 5%, it has ultimately comfortably surpassed that level as the market weighs the impact of recent episodes of violence, explains Michiel Tukker, senior interest rate strategist in the UK and eurozone at ING Research. In his view, the gap opened between France and the rest of the market indicates that "contagion risks are still considered minimal."
The analyst also emphasizes that the short end of the euro swap curve has shown notable resistance against the correction of French bonds, highlighting that inflationary pressures continue to be the main concern for investors.
For his part, Carsten Brzeski, global head of Macroeconomics at ING, recalls that, although the ECB surprised in September with a tougher message than expected, a month later, and after the fiscal and political crisis in France, "it is unlikely that the ECB will repeat the restrictive tone at next week's meeting."
"It is very likely that the ECB will keep interest rates unchanged next week and postpone any decision on a new rate hike until December," says the expert.
Although France is not mentioned in the ECB's official statement next week, Brzeski believes it will be one of the focal points at the press conference of the central bank's president, the French Christine Lagarde, amid doubts about a possible ECB action in response to the widening of the spreads of French sovereign debt.
However, the economist warns that, before activating the Transmission Protection Instrument (TPI), the ECB Governing Council will evaluate a cumulative set of conditions to check whether the affected countries are implementing sound and sustainable fiscal and macroeconomic policies. In practice, this involves respecting the EU fiscal framework, which would imply, at a minimum, the full approval of the budget presented by the French Government.
Consequently, the ECB could find itself in a complicated situation, as an intervention too early in support of France could generate resentment among other member states and be perceived as monetary financing of the debt of a country that resists complying with common rules. Additionally, future changes in the ECB's leadership could also influence the institution's position regarding the use of the TPI.