President Francois Hollande likes to trumpet his endorsement by bond buyers. Investors say French yields are dropping in spite of him, not because of him.
The yield on France’s benchmark 10-year bonds, which fell to the lowest in about a year of 1.873 percent last week, was at 1.92 percent today. At that level, France’s borrowing costs are 74 basis points below those of the U.S. and 82 points less than the U.K. The premium France pays over Germany is down to 45 points, from 72 points in January.
The bond market’s performance belies the anemic recovery in France relative to those countries and mounting political discontent that may limit Hollande’s ability to deliver on promised cuts in public spending and taxes. French borrowing costs have been driven lower by a hunt for returns and European Central Bank President Mario Draghi’s comments about lower interest rates, said Fabrizio Fiorini, chief investment officer at Aletti Gestielle AGR SpA in Milan.
“The yield on French government bonds is driven by flows which are influenced more by monetary policy than Hollande’s reforms,” said Fiorini, whose firm manages about 12 billion euros ($16 billion). “If I’m bearish on French bonds, it’s probably because I don’t think the European Central Bank will resort to bond purchases or quantitative easing that’s been priced in.”
The European Commission expects France to grow 1 percent this year, compared with almost 3 percent for the U.K. and U.S. and 1.8 percent for Germany.
“Some of Hollande’s policy is choking the economy that’s already relatively weak,” said Grant Peterkin, a money manager at Lombard Odier Asset Management in Geneva. “We just don’t find their yields compelling enough against that social and policy backdrop.”
ECB President Draghi said May 8 that policy makers are “comfortable” taking further action in coming months in the face of regional inflation that is well below the central bank’s target. The yield on French 10-year bonds fell following the comments, ending the week down about six basis points.
French bonds returned 4 percent this year through yesterday, beating debt issued by Germany, Finland, Austria, the U.S. and the U.K. Since Hollande was sworn in on May 15, 2012, they have gained 11 percent.
French voters have been less equivocal. Hollande’s Socialist Party was routed in local elections in March. Polls show that as little as 18 percent of the electorate approve of his stewardship, the lowest for any French president.
The Socialists may come in third behind the opposition Union for a Popular Movement and the anti-euro National Front in the European parliamentary elections May 25, some polls show.
After two years in office, Hollande, 59, is trying to revive the economy and his popularity by promising to cut government spending and taxes by 50 billion euros.
He said in a phone-in show on RMC radio and BFM Television last week that it’s understandable that voters are discontent at a time of crisis while noting that support from bond investors shows his policies are the right ones.
“Are interest rates high today? They’re the lowest in our history,” he said. “The problem is we lack growth. And when I say things are turning it’s because they are. We have taken the measures that will bring us results tomorrow. I’m asking the French to have confidence in themselves.”
Last month, France’s credit rating was affirmed by Standard & Poor’s, which said Hollande was shifting toward improving competitiveness. The nation’s long- and short-term sovereign foreign and local currency credit ratings was left at AA/A-1+. France lost the top rating at S&P in January 2012. The outlook is stable, according to the ratings company.
Yet a revolt by 41 Socialist lawmakers in an April 29 vote on the broad lines of Hollande’s spending-cuts package suggests that the government faces an uphill battle implementing the plan, economists say.
“Fundamentally, if everything that is promised is implemented, we’ll be quite happy,” said Fabrice Montagne, an economist at Barclays in Paris. “The announced plans are great but we’re advising clients that at every turn the votes are going to be counted now and nothing should be taken as done until it is actually completed.”
Details of the spending cuts will come when Hollande’s government presents a supplementary 2014 budget in late June and then a 2015 budget in September. The European Commission will give its judgment of Hollande’s efforts on June 5.
Still, some investors urge caution on big bets against French sovereign bonds even as the economy struggles to emerge from two straight years of stagnation.
“It’s difficult to go all-out short on France,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank in London. “Any temptation to sell French bonds tends to be tempered by the fact that France is an industrial power in the region, that their debt is safe, offers higher yields than Germany’s and is backed up by a very liquid market.”
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