Is it worth buying French bonds after the elections?

Is it worth buying French bonds after the elections which decreed the surprise victory of the left? The recent elections in France have left the country in a situation of political uncertainty, significantly influencing financial markets, particularly government bonds. The deadlock in the French parliament is adding to investor concerns, as seen by the rising risk premium for French government bonds relative to their German counterparts. The spread between the yields of French and German 10-year bonds is volatile: today it stands at 62 basis points, from 72 bps on Friday (still high compared to the 47 bps at the beginning of 2024).

Spread Oat-Bund

Source: Borsaitaliana

But what does all this mean for investors? Let’s analyze the data to determine if it is advisable to invest in French government bonds after the elections, considering the current political and economic situation.

Bond, is it worth buying French bonds after the elections?

Recent elections in France have left parliament divided and without a clear majority, generating political uncertainty and prompting investors to review their French government bond strategies. This uncertainty has caused French government bond prices to fall, raising the 10-year bond yield (OAT) by three basis points, which now stands at 3.16%. Poll forecasts indicated that Marine Le Pen’s Rassemblement National (RN) would become the largest party, but the election result divided the national assembly into three large groups (left, centrists, and far right), each with different agendas and without a tradition of collaboration.

France’s Credit Default Swap (CDS)

Source: worldgovernmentbonds

Political uncertainty is reflected in the French bond market yield curve, highlighting an uncertain economic picture and pressure on debt. The value of the French 5-year Credit Default Swap (CDS) is currently 31.47 basis points, indicating an implied probability of default of 0.52%, based on an assumed recovery rate of 40%. This metric highlights the perceived risk associated with French sovereign debt.

A significant example of this situation is represented by the security OAT TF 0.5% MG72, expiring in May 2072. In recent months, the market has exaggerated the selling of this security, but now it may have reached the bottom.

Oat Tf 0.5% Mg72 Eur graph

Source: Borsaitaliana

Looking at different maturities, here is a current picture of French government bonds:

Analyzing the yield curve we note an anomalous trend that offers investment opportunities for investors with a greater appetite for risk.

OAT yield curve

Source: worldgovernmentbonds

After the elections, yields on long-term French government bonds (from 10 years onwards) rose, signaling that investors are pricing in turbulence and prefer to lighten their positions.

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French bonds, analysts’ opinions

This scenario has further frightened investors, worried that the left’s plans could nullify many of the pro-market reforms launched in the last seven years and hinder efforts to contain the French public debt, which in 2023 stood at 110, 6% of GDP.

The left-wing alliance’s success has put a spotlight on its campaign for a sharp increase in public spending, exacerbating fears over France’s budget and putting the nation on a collision course with the European Union, which is already taking steps to curb the budget deficit. However, the left-wing alliance does not have an absolute majority, which limits its ability to implement radical changes. Some strategists have suggested that a deadlocked parliament could be a positive outcome for investors.

Aneeka Gupta, director of macroeconomic research at WisdomTree, said: “It will be very difficult to advance and pass any policy and make progressive reforms because each party’s vote is split and no one has an overall majority ”. However, Gupta added: “I think the markets will be relieved that we are avoiding this extreme situation with the far right.”

According to Vincent Mortier, group chief investment officer at Amundi, volatility in fixed income is expected to decrease as the political situation becomes clearer.

Mark Haefele, chief investment officer of UBS Global Wealth Management, notes that the fiscal situation in Paris will remain complex and will reduce the room for maneuver of the next executive. “In the short term, political news will continue to influence French government bonds, especially medium and long-term bonds. In terms of creditworthiness, France’s long-term outlook is deteriorating and a rating downgrade is possible. We prefer less volatile French corporate bonds to government bonds and see opportunities among investment grade bonds from multinationals, which are less exposed to national political developments and offer attractive yields”.

Economists at Nomura expect the inauguration of a centrist technocratic prime minister: “when this happens, political uncertainty has eased, we expect OAT-Bund spreads to narrow again”.

Investors may welcome French results after the initial nervous reaction. Geoffrey Yu, senior strategist at Bank of New York Mellon, said: “French politics is confusing once again. Based on the results, the risks of an expansionary fiscal policy remain and perhaps have increased at the margins”.

Original article published on Money.it Italy 2024-07-08 16:09:13. Original title: Bond, conviene comprare i titoli francesi dopo le elezioni?