Following the collapse of the French government, the risk premium on French debt decreased from its highest point in over a decade.
This shift occurred on Thursday when the premium investors require to hold French bonds rather than German Bunds lessened by 3 basis points to 80.90 bps. Earlier in the week, the premium had expanded to 90 bps, the widest margin since 2012.
The government’s downfall was precipitated by a coalition of far-right and left-wing legislators who supported a no-confidence motion against Prime Minister Michel Barnier earlier this week.
Market observers had anticipated a subdued market response to the government’s collapse, or even a ‘buy on rumors, sell on news’ behavior.
Analysts have suggested that France may be entering a period of prolonged crisis, potentially leading to a gradual decline in sovereign creditworthiness and weaker economic growth.
They referenced the government’s draft budget proposals, which included 60 billion euros in spending reductions and tax hikes aimed at reducing the deficit to 5.1% of GDP by 2025.
Euro zone borrowing costs have seen a slight increase as investors await employment data from the United States, which could influence expectations for the Federal Reserve’s future monetary policy.
Federal Reserve Chair Jerome Powell indicated on Wednesday that the U.S. economy’s resilience surpassed the central bank’s forecasts from September, suggesting a potential slowdown in the pace of interest rate reductions.
Meanwhile, Germany’s benchmark 10-year government bond yield rose by 2.5 basis points to 2.08%, after reaching a low of 2.033% the previous week, marking the lowest point since early October.
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