His popularity ratings are in the cellar, and his personal life is a mess. But French President François Hollande at least could count on enthusiastic support from bond markets—until now.
The yield on France’s benchmark 10-year bonds, reflecting the premium demanded by investors to hold its sovereign debt, has risen to 2.5 percent from a record low 1.7 percent last spring. A debt auction on Jan. 9 drew the weakest demand in a decade.
Eighteen months after he took office, markets are growing impatient with Hollande’s failure to repair France’s sagging economy. On Jan. 14, he outlined new reform measures, including a planned €30 billion ($41 billion) in payroll tax reductions aimed at reining in labor costs to boost competitiveness. Yet the announcement was largely overshadowed by news of his alleged affair with actress Julie Gayet.
“France is uncoupling from the rest of Europe,” Standard & Poor’s (MHFI) chief European economist, Jean-Michel Six, said at a press conference in Paris on Jan. 14. “France is the only major economy in Europe whose trade deficit with Germany has widened. Italy and Spain have narrowed theirs.”
Indeed, there’s growing investor appetite for debt from some of the region’s most troubled economies. Portugal and Ireland recently held successful bond sales, and even Greece is contemplating a return to debt markets. Yields on Spanish and Italian debt have fallen to record lows in recent weeks.
France’s borrowing costs are still less than half those of Spain and Italy, and despite recent downgrades by credit rating agencies, there’s scant risk that Europe’s second-largest economy would default on its sovereign debt.
Still, France now has the worst-performing bonds of any major euro zone issuer except Belgium. “French bonds are underperforming both cores and peripherals,” John Stopford, head of fixed income at Investec Asset Management in London, tells Bloomberg News. “They are deteriorating in terms of quality, and they don’t compensate you enough for those risks.”