PARIS: A measure of French bond risk posted its biggest drop since the 2020 pandemic as local markets rallied after the nation dodged a downgrade at Moody’s Ratings.
The extra yield investors demand to hold 10-year French bonds, known as OATs, over safer German debt fell 14 basis points to 154 basis points on Monday, the largest drop in six years on a closing basis.
France’s stocks rose and the euro outperformed most of its G10 peers.
Moody’s kept France’s rating steady at Aa3 with a negative outlook last Friday, surprising many who had expected a downgrade.
Despite the challenging political and social environment, the firm said it’s baseline assumption is that “a deficit-reducing budget for 2027 will eventually be adopted, possibly by decree”.
The decision is “a pleasant surprise for battered OATs”, said Rohan Khanna, head of European rates strategy at Barclays Plc.
French bonds rallied on Monday, with the 10-year yield down 12 basis points, the most since April, to 4.90%.
The euro, which took a hit from the turmoil in French markets, slipped 0.1% to US$1.1191 amid broad dollar strength but still outperformed most peers. The CAC 40 Index rose as much as 1.2%.
A downgrade from Moody’s was widely expected partially because other major rating firms already have lower credit scores for France.
S&P Global Ratings and Fitch Ratings place the nation’s debt one notch below, after cutting their assessments during a budget clash in the fall of 2025.
“We were surprised by Moody’s not downgrading,” said Piers Hillier, chief investment officer at Jupiter in France. “Maybe it’s just a matter of time. But the backdrop there is not getting any better any time soon.”
Barclays’s Khanna also questioned how far the tailwind from the decision will last, citing upcoming European Central Bank and US Federal Reserve interest rate decisions as well as inflation numbers for October among a host of potential triggers for market moves.
France remains unable to find a way to contain its swelling debt burden, which put the nation at the forefront of market anxiety over the past weeks. The premium investors demand to hold French 10-year bonds over German peers has surged over the past month, reaching 178 basis points last week, the highest since 2011.
Stocks have also underperformed, with the CAC 40 falling about 4% this year while the Stoxx Europe 600 gained nearly 8%.
France’s debt mountain is fuelled by a deficit set to blow out to 5.4% of economic output this year. Political gridlock, slumping growth and rising interest costs have derailed attempts at consolidation.
Prime Minister Sébastien Lecornu has proposed a finance bill to sharply constrain spending and raise tax revenues to meet a deficit goal of 5% next year, but the blueprint’s future is uncertain as he has no majority in parliament.
France’s National Assembly rejected the “receipts” portion of the 2027 social security budget bill, which sent the original version of the draft law to the Senate.
“There is no change in the current paradigm and what you have today is a mix of a technical rebound and some relief on the Moody’s status quo,” said Christopher Dembik, senior investment adviser at Pictet Asset Management, who sees the 10-year French yield trading higher between 5% and 6% until the presidential election.
“I can’t see any solution for France’s fiscal position to improve in the short term.” — Bloomberg
