A measure of France’s borrowing costs exceeded Italy’s for the first time in the euro zone’s history, demonstratingA measure of France’s borrowing costs exceeded Italy’s for the first time in the euro zone’s history, demonstrating how investor concerns over fiscal policy are redrawing the region’s bond markets.
The shift on Tuesday was due to technical reasons, as the underlying bond used for benchmark French 10-year yields moved to a slighter later maturity than the Italian equivalent. But the trend toward convergence between the two nations’ debt has been years in the making.
For market veterans, it’s a remarkable development given lower-rated Italy was for years the region’s poster-child for fiscal profligacy. Now it’s France that’s worrying investors, with Prime Minister Francois Bayrou resigning Tuesday after losing a confidence vote.
“Expectations for a speedy resolution to France’s political and fiscal woes are likely to remain constrained,” said Sam Hill, head of markets insights at Lloyds. Its bonds will remain sensitive to broader market concern over budget deficits and debt piles, he added. how investor concerns over fiscal policy are redrawing the region’s bond markets. The shift on Tuesday was due to technical reasons, as the underlying bond used for benchmark French 10-year yields moved to a slighter later maturity than the Italian equivalent. But the trend toward convergence between the two nations’ debt has been years in the making. For market veterans, it’s a remarkable development. Kallum Pickering Chief Economist at Peel Hunt tells Bloomberg radio’s Caroline Hepker and Valerie Tytel that there’s a wider issue of debt burdens in large economies, and the UK is more vulnerable than many other nations.
Bayrou’s successor will need to find a way to pass a budget in a splintered parliament, an exercise that’s toppled the last two prime ministers. French bonds have been the worst performing in the region since President Emmanuel Macron called a surprise election last year.
That instability has driven up France’s 10-year yields to among the highest yielding in the bloc, having already surpassed former market pariahs such as Greece and Portugal. Shorter-dated French yields overtook equivalent Italian rates earlier this year.
Traditionally, Italian bonds offered a juicy pick-up to peers because investors demanded higher compensation for a tumultuous political backdrop and larger borrowing plans. During the height of Europe’s sovereign debt crisis in 2012, Italy’s yield premium was more than four percentage points over France. The spread was around two percentage points as recently as 2022.
But in recent years Italian bonds have outperformed as Prime Minister Giorgia Meloni provided political stability in Rome alongside some efforts to consolidate the nation’s debt.
Investor focus is turning to Fitch Ratings’ scheduled update concerning France’s creditworthiness, the first in a series of reviews in the comings months. France’s scores from S&P, Moody’s and Fitch are AA-, Aa3 and AA- respectively compared to BBB+, Baa3 and BBB for Italy.
“French spreads are consistent with a ratings downgrade,” said Guillermo Felices, global investment strategist at PGIM Fixed Income.
To be sure, a maturity mismatch distorts the comparison between the two nation’s 10-year yields. The new French benchmark yield is based on a bond maturing in November 2035, several months after the Italian equivalent. That means the French yield reflects additional duration risk.
The benchmark French rate traded as much as one basis point higher than the Italian equivalent, before the move pared as the European session progressed. The French benchmark yield was at 3.47%, lower than its 2025 peak of 3.63%.
Still, it’s the latest unwanted market milestone for French officials. President Macron is expected to select a new prime minister within days, who will be the fifth in less than two years — a reflection of the irreconcilable blocs in the country’s fractured political landscape.
Credit to : Bloomberg Podcasts