LONDON, Sept 24 (Askume) – France’s borrowing costs rose higher than Spain’s for the first time since 2008 on Tuesday, data from the London Stock Exchange Group (LSEG) showed, raising investor concerns about the new French government’s ability to tackle a high budget deficit.
Investors raised bets on a European Central Bank interest rate cut in October after weak economic data on Monday , pushing long-term euro zone government bond yields slightly higher while interest rate sensitive short-term bond yields fell.
Since the financial crisis, Spanish bonds have been trading at a higher yield than French bonds as the country has traditionally been seen as a riskier investment.
But in early European trade, the so-called spread between Spanish and French 10-year bonds briefly entered negative territory, with both trading around 2.98%, widening again to about 1.5 basis points.
“Markets are clearly reacting to developments in France,” said Emmanuel Karimalis, macro rates strategist at UBS.
“There is still no clarity on the fiscal (policy) front and our purchasing managers’ index was very negative yesterday,” he said, citing survey data on Monday that showed French business activity unexpectedly fell in September.
Since French President Emmanuel Macron called a snap election in June, investors have placed a premium on holding French debt relative to the bonds of other euro zone countries . The vote destabilized parliament, with the left unexpectedly becoming the largest faction.
France’s newly appointed finance minister, Antoine Armand, expressed concern about his youth and inexperience on Tuesday , saying the country faces “one of the worst deficits in our history.” The deficit could reach 6% this year , well above the EU’s 3% limit.
The euro zone’s benchmark German 10-year bond yield rose to 2.176% after falling 5 basis points on Monday. The yield is inversely proportional to the price.
German two-year government bond yields, which are sensitive to ECB interest rate expectations, fell 4 basis points to 2.129%, the lowest level since March 2023.
Traders on Tuesday put the probability of the European Central Bank cutting rates in October at about 45%, compared with about 15% earlier in the week, according to currency market pricing.
Survey data on Monday showed euro zone business activity fell unexpectedly sharply this month, driven by a slowdown in the main services sector.
Christoph Rieger, head of rates and credit research at Commerzbank, said: “Eurozone PMIs fell below all expectations, reviving speculation about the next ECB interest rate cut in October.”
China announced its biggest economic stimulus plan since the pandemic , aimed at boosting an economy hit by a real estate crisis, but this had no impact on euro zone bonds.
Italy’s 10-year government bond yield rose 1 basis point to 3.527%.
