French bonds feel pain after more violent anti-government protests
LONDON: French government bond yields rose on Monday, pushing the gap over safer German peers to its widest since May, after more violent antigovernment protests in France over the weekend.
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 President Emmanuel 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 per cent in the quarter from the previous three months, down from 0.4 per cent 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.”
At one stage, French bond yields rose up to 7 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 hit 0.725 per cent, almost 8 bps above 4 1/2month lows hit last week, before easing to around 0.69 per cent towards the end of the session, still higher on the day.
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.
Macron will make a televised address at 1900 GMT as he seeks to placate protesters, whose revolt poses his biggest challenge since assuming the presidency 18 months ago.
Analysts said Macron is expected to announce new fiscal measures, implying upward pressure for French yields.
“The big picture is that the budget deficit will worsen and political problems will make cuts to spending hard,” said Rabobank rates strategist Lyn GrahamTaylor.
Political uncertainty also put upward pressure on Belgian yields. Prime Minister Charles Michel re- launched his government on Sunday as a minority administration after the biggest party in his coalition quit in a dispute over a United Nations migration compact.
British Prime Minister Theresa May’s decision on Monday to postpone a parliamentary vote on her Brexit deal, after admitting that she faced a rout, pushed down British gilt yields .
That helped keep German Bund yields pinned at 0.24 per cent, a shade away from recent six-month lows of 0.22 per cent.
Italy’s bond yields fell as much as 6 bps on hopes of a compromise with the European Union over Italian budget plans.
Italian Prime Minister Giuseppe Conte will meet European Commission President JeanClaude Juncker on Wednesday in Brussels.
“This morning, the rumours are that Italy could present another revised budget this week and that has helped push yields lower,” DZ Bank analyst Sebastian Fellechner said. — Reuters