On July 7, 2024, after the defeat of the far-right forces in the French legislative election, supporters of the left-wing alliance “New Popular Front” gathered at the Place de la République in Paris, France.
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French government bond markets saw some selling early on Monday but were generally calm despite political deadlock following the second round of legislative elections.
France’s 10-year bond yield, which is inversely related to price, rose 3 basis points in early trading but fell back shortly afterwards to be relatively flat at 3.221% around 9:30 am London time.
Unease has spread across French government bond markets in recent weeks. After French President Emmanuel Macron announced early parliamentary elections in mid-June, the 10-year government bond yield exceeded 3.3%, hitting a nearly eight-month high.
Meanwhile, the gap, or spread, between French bond yields and German bond yields has exceeded 85 basis points in recent weeks, reaching its highest level since 2012.
Spreads fell as the election approached, widening to more than 70 basis points on Monday before falling back to around 67 basis points.
Despite France’s challenging fiscal situation, things have remained relatively calm. Two weeks ago, the European Commission announced that it intended to place France under excessive deficit procedures due to France’s failure to control its budget deficit to less than 3% of gross domestic product. The EDP is an action initiated by the European Commission against any EU member state that exceeds its budget deficit ceiling or fails to reduce its debt.
That means the tax and spending plans of the left-wing New Popular Front and the far-right National Alliance party (RN, or National Rally) have been a key cause for concern in the snap election.
Sunday’s results showed the New Popular Front alliance unexpectedly won the most seats in the country’s parliament but fell short of an outright majority. French President Emmanuel Macron’s Ensemble party and its allies came in second, while the far-right National Rally, which won the first round and is expected to remain strong in the runoff, came in third.
David Roach, president and global strategist at Independent Strategies, said in a note on Sunday that a Syriza victory could actually be worse economically than the National Rally government.
He said any relief from an outright victory for the far-right National Front would be short-lived and recommended shorting French government bonds and German bonds.
François Digard, head of French equity research at Kepler Cheuvreux, said a hung parliament was largely priced in by the market, although it was now more left-wing than expected.
“We believe there will be a negative reaction on both the index and spreads, with spreads likely to widen and possibly even return to where they were 10 days ago,” he told CNBC.
He added that a confrontation with Brussels was still possible for Syriza, but not to the same extent as if it had won a national rally. Degard added that the key now is who is appointed prime minister.
—CNBC’s Jenni Reid contributed to this article.
