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Bond fund managers say France’s borrowing costs are likely to continue rising as the budget fails to allay fears about the country’s fiscal deterioration and political uncertainty.
On Thursday, French Prime Minister Michel Barnier announced 60 billion euros in spending cuts and tax increases, saying “the credibility of France’s signature must be preserved.” France is on track to run a deficit of more than 6% of domestic output this year, well above its target, while its overall debt burden as a percentage of GDP is the third worst in the euro zone after Greece and Italy.
Investor concerns about France’s debt burden have led to a slide in long-term French government bonds this year, with the country’s 10-year bond yield above 3%, above Spain’s for the first time since the 2008 financial crisis.
Investors are demanding a 0.77 percentage point premium over the euro zone benchmark Germany, near the highest level in 12 years ahead of this summer’s parliamentary elections.
Kevin Tozette, a member of the investment committee at French fund manager Carmignac, said the budget’s “generous” assumptions about economic growth and productivity growth left many corporate bondholders scratching their heads. I am confident that it is,” he said.
He also said there were political risks in passing the budget, as parliament could topple Barnier’s government, and that Paris needed strong economic performance in the coming months to meet its growth forecasts. also emphasized.
“If one piece of the puzzle moves in the wrong direction, the spread could go even higher,” Torzet said.
Other bond investors also said the unstable French government was discouraging buyers.
Royal London Asset Management’s Gareth said investors were “relieved that Mr Barnier’s government was formed and was able to produce a budget in a timely manner, but the market was left uneasy about the underlying instability in French politics. I have no illusions.” hill.
He said the “prospects” of an upcoming review of France’s sovereign credit ratings and the challenge of passing “tough” budgetary decisions through parliament were weighing on bond prices.
France expects to issue 300 billion euros in bonds in 2025, adjusted for buybacks. Barclays analysts said this was slightly below expectations and a positive surprise, but added: “How reliable the government’s deficit estimates are remains an open question.”
“Ultimately,[French debt]has not yet floated our boat,” they said.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said France’s “biggest risk” remains political uncertainty, but that investors are “probably ok with the outcome for now. I regard it as such.”
He said BlueBay recently booked a profit on a bet on France’s 10-year bond when the spread over Germany reached 0.8 percentage points, but said it would place the bet again if the spread fell sufficiently. Ta.
Ben Lord, fund manager at M&G Investments, said: “We are also concerned about the continued fiscal easing in France” despite the announced measures. “There is still uncertainty about how effective these will be, especially in terms of taxes,” he added.
