France Gets Whacked by the Bond Market

If I was the head of bond sales for France, I'd be somewhat worried that investors seem to be downgrading my status to that of peripheral European borrower.
In a bit of a twist.

Take a look at this chart showing today's hop in France's 10-year borrowing cost:

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Given the scale of the rout in the world's financial markets, a jump of 11 basis points in your 10-year yield to 1.24 percent is nothing for a sovereign borrowing officer to worry about, right? Especially when investors drove that level to a record low yesterday, yes?

Except ... take a look at this chart, showing the relative performance of French bonds versus their German counterparts:

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In short, fixed-income investors are prioritizing the perceived safety of German bunds over everything else in Europe. U.S. Treasuries, for example, have narrowed their yield gap to German securities. So while yield spreads for both Spain and Italy have also widened today, neither of those was previously classed as a core European country by the investment community.

Now, maybe Eric Oynoyan, a strategist at BNP Securities, was correct when he told Bloomberg's Max Julius that the move is "just a blip" reflecting how investors are managing their liquidity rather than expressing any view on French creditworthiness.

But the backdrop is ominous. France is tussling with the European Union because its budget plans mean it'll be two years late in meeting its deficit target. Earlier this week, Fitch said that may prompt it to cut France's AA+ rating. So if I was the head of bond sales for France, I'd be somewhat worried that investors seem to be downgrading my status to that of peripheral European borrower.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Mark Gilbert at magilbert@bloomberg.net

    To contact the editor on this story:
    Toby Harshaw at tharshaw@bloomberg.net

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