French-German Bond Spread Reaches Highest This Year as PM Quits

Sebastien Lecornu

(Bloomberg) -- French bonds fell, pushing the yield premium of German bonds to the highest level this year, after French Prime Minister Sebastien Lecornu resigned.

The yield on 10-year notes rose as much 11 basis points to 3.61%. That pushed the nation’s borrowing premium over German debt — a key gauge of fiscal risk — to more than 89 basis points. The spread hit 90 basis points last year, the most since 2012.

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Meanwhile, the euro fell 0.7% against the dollar, while France’s CAC 40 index of stocks slid 2%.

The resignation “plunges France towards the unknown,” said Luigi Buttiglione, founder of advisory firm LB Macro. “The French economy is poised to suffer from the unavoidable further loss of confidence by the business sector, thus impacting activity in the whole EU give the weight of France.”

The resignation came after President Emmanuel Macron named a broadly unchanged cabinet Sunday, which sparked an immediate backlash from opposition parties as well as his own supporters.

The country’s credit rating has twice been downgraded since Lecornu took office. Moody’s holds an Aa3 rating on France with a stable outlook, and is scheduled to next update on Oct. 24. S&P has an AA- assessment with a negative outlook ahead of its next review on Nov. 28.

“I am struggling to see how France avoids an election with this parliament lacking a mandate,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho.

(Updates throughout)

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