French bonds feel pain after more violent anti-government protests
LONDON (Reuters) – French government bond yields rose on Monday, pushing the gap over safer German peers to its widest since May, after more violent anti-government protests in France over the weekend.
French President Emmanuel Macron on Monday pledged to cut taxes for pensioners and raise the minimum wage in January but refused to reinstate a wealth tax, as he sought to respond to a wave of protests that have challenged his authority.
“We will respond to the economic and social urgency with strong measures, by cutting taxes more rapidly, by keeping our spending under control, but not with U-turns,” Macron said in a TV address to the nation.
The turmoil in France comes as heightened global trade tensions, Brexit uncertainty and caution before this week’s European Central Bank meeting are bolstering demand for top-rated German debt.
While higher-rated French bonds often benefit from risk aversion in world markets, turmoil in France prompted investors to stay away.
The anti-government protests will slow growth to close to a standstill in the final quarter, the central bank said on Monday, complicating Macron’s task of finding concessions to placate the “yellow vest” movement.
The Bank of France on Monday forecast the euro zone’s number-two economy would eke out growth of only 0.2% in the quarter from the previous three months, down from 0.4% in a previous estimate.
“Concern about a bit of political and fiscal capitulation is rarely good for a bond market,” said Chris Bailey, European strategist at international financial services firm Raymond James.
“In the wider scheme of things, the bond spread is pretty tight versus Germany but does show a bit of tension in the European bond fraternity.”
French bond yields rose as much as seven basis points on the day across the curve, with France standing out as the weakest performing bond market in the bloc.
Ten-year bond yields rose over three basis points to 0.725%, almost eight basis points above four-and-a-half month lows hit last week.
The gap between 10-year bond yields in France and Germany widened to around 46 basis points, the biggest difference since late May, when a rout in Italian bonds rippled over into other euro zone bond markets except Germany.
“The big picture is that the budget deficit will worsen and political problems will make cuts to spending hard,” said Rabobank rates strategist Lyn Graham-Taylor.