📝French Spreads to Widen As Long As Budget Negotiations Continue: Rabobank

The decision to appoint a new prime minister should support French sovereign bonds in the near term. However, we believe there is limited scope for a further rally. In fact, we see risk of renewed spread widening persisting as long as the budget negotiations continue. The fall of Lecornu’s government led to a widening of the French-German sovereign spread earlier in the week. This reflected both the new bout of political uncertainty, and the fading prospect of meaningful fiscal consolidation. This widening has been mostly retraced after it became clear that Macron will appoint a new prime minister, rather than call for a parliamentary or presidential election. But we don’t see scope for much further tightening of French sovereign spreads, and we believe risks of a renewed widening are still substantial.

If the government does manage to win parliament’s support for a 2026 budget, spreads may come in further as uncertainty is priced out. But concessions to the opposition, in the form of watered down austerity measures, would come at the expense of fiscal sustainability. Part of that may already be priced in – France is already trading at wider spreads than peers with a comparable rating. However, ongoing fiscal concerns could leave the French curve more vulnerable to future shocks - Rabobank