France Sells EU8.43 Billion in Debt, With Borrowing Cost Falling

France sold 8.43 billion euros in debt, with yields falling in the first bond sale after President Francois Hollande consolidated his position by winning a majority for his party in the country’s parliament.

France’s 3.34 billion euros in five-year notes yielded on average 1.43 percent, a record low, compared with 1.72 percent on May 16. The French auction contrasted with Spain's debt sale of 2.22 billion euros with borrowing costs more than doubling.

Carrying a higher credit rating than Spain or Italy and offering better returns than German securities, France finds itself in a sweet spot, drawing strong auction demand as bond investors give Hollande, the country’s first Socialist president in 17 years, the benefit of the doubt.

Hollande, who has promised to cut budget deficits, was boosted after a majority in the June 17 legislative election for his party and its allies paved the way for them to pass laws without the aid of other members of parliament.

On June 18, a day after the second and decisive round of the French legislative elections, France sold 9.1 billion euros in one-month, three-month, five-month and 12-month bills with yields sliding from the previous auction of the securities.

Before the sale today, French benchmark 10-year bonds yielded 2.66 percent, with investors paying 107.6 basis points more to hold French debt relative to comparable German bunds.

Control of the lower house of parliament will allow Hollande to push through the tough decisions needed amid Europe’s debt crisis. With growth stalling at home, Hollande faces the task of telling the French people that the state’s depleted coffers may mean cuts in spending and higher taxes as he makes good on his deficit-cutting promises.

No Growth

France’s gross domestic product failed to grow in the first three months of the year and the Bank of France predicts that Europe’s second-largest economy may shrink in the current quarter for the first time since the nation exited recession in 2009. French jobless claims rose for a 12th month in April to 2.89 million, the highest in 12 years.

The lack of growth means that budget cuts will probably have to be deeper than previously estimated. The European Commission said May 30 that France may need to take “significant” steps to meet its target of reducing the budget deficit to 3 percent of GDP next year.

France today sold 2.78 billion euros of two-year notes at an average yield of 0.54 percent, down from 0.74 percent on May 16. It sold 1.22 billion euros of 2015 notes, paying 0.83 percent compared with 1.51 percent on Jan. 19 and 1.1 billion euros of 2016 securities at an average yield of 1.05 percent compared with 1.40 percent on March 15.

Later today, the country will sell as much as 1.5 billion euros of inflation-linked bonds.

To contact the editor responsible for this story: Steve Rhinds at srhinds@bloomberg.net

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