The BTP-OAT spread narrows after yet another French government collapse, this time under Francois Bayrou. France under attack, bond vigilantes unforgiving.
What had been predicted several weeks ago has come true. The latest collapse of the French government, this time under Francois Bayrou, and the resulting surge in OAT yields, or French government bonds, has brought the Italy-France spread, specifically the 10-year BTP-OAT spread, to zero.
Wave of OAT selling, the Italy-France spread is zero
The sell-off in French government bonds, under attack from bond vigilantes, has driven 10-year yields up 7 basis points, according to Bloomberg, to 3.48%, the same level as 10-year BTP yields today, which have risen just 1 basis point, also standing at 3.48%. Result: the spread between the two countries is now zero.
Yields on other European bonds are also rising today, although at a much slower pace, as demonstrated by the case of BTPs, compared to the increase in French bonds.
German Bund yields are up 2 basis points, to 2.66%, yields on Spanish Bonos are up 1 basis point to 3.24%, while yields on Dutch government bonds are up 1 basis point to 2.82%.
Portuguese bond yields are also showing upward pressure, but without any particular signs of stress, rising 1 basis point to 3.07%. And Greek bond yields are up just 1 basis point, standing at 3.32%.
In essence, OATs and BTPs are now confirmed as the riskiest eurozone bonds of all.
That said, with OAT yields now equaling BTP yields in the aftermath of the fall of the Bayrou government, the Meloni government can now claim another "victory": that of the elimination, precisely, of the Italy-France spread, a prospect that analysts had already factored in in recent sessions, when yet another government collapse in Paris had been taken for granted.
Italy continues to celebrate. Not just against France, the great revenge with the BTP-Bund spread slide
Italy’s revenge on those who, before the Italian government led by Giorgia Meloni took office at the end of 2022, had already written it off following the fall of the Draghi government, has been repeatedly emphasized by the Italian government.
At the end of August, the press release from the Ministry of Economy and Finance, led by Giancarlo Giorgetti, highlighted the decline in the other spread, the one that measures Italy’s risk—and which, according to some, is no longer even the benchmark for assessing the country’s creditworthiness—the spread between German Bund yields and 10-year BTPs.
In less than a year, the spread has continually crossed key psychological levels: first the one known as Giorgetti’s target, then the 100 basis point threshold, which so enthused Prime Minister Giorgia Meloni that she made a gaffe that practically made history.
The 10-year BTP-Bund spread subsequently also slipped below 90 and 80 basis points, until it sank, as the Ministry of Economy and Finance recalled, to 71 basis points, as stated in the note, which also did not fail to mention the sharp drop in the Italy-France spread, before it was reset today, Tuesday, September 9, 2025:
“The (BTP-Bund) spread, which in September 2022 – shortly before the inauguration of the Minister of Economy and Finance Giancarlo Giorgetti – had reached 251 basis points, touched 71 basis points on August 15, 2025. On August 27, the spread between French OATs and Italian BTPs also narrowed to a record low of around 5.5 basis points. A visible and measurable effect of the responsible work carried out by the executive in these first three years.”
With the ongoing crisis in Paris, and with the Italy-France spread now reaching zero, one thing can certainly be said: Italy is now perceived by the markets as the now-virtuous France that, at the time of the sovereign debt crisis 15 years ago, alongside Angela Merkel’s Germany, had repeatedly pulled Rome’s ear, boasting about its public finances. Public finances that are now in shambles here too.
If the OATs have repeatedly come under attack, it is, in fact, precisely because of the fear that the lack of a stable government in Paris will prevent France from implementing the necessary and essential measures to reduce its deficit and debt levels: levels that the Bayrou government sought to contain with an austerity package, which ultimately ended up signing its own death warrant.
Paris’s debt stood at 3.3 trillion euros in June, equal to 114% of GDP.
This is an even lower percentage than the public debt levels of Greece (153%) and Italy (138%). But, unlike France, these two countries boast a budget surplus and, above all, are fulfilling the tasks assigned by the European Union with the Stability and Growth Pact. Paris, however, once again without a government, is not even in a position to carry out those tasks.
What the analysts say. Short- and long-term prospects. Scope Ratings’ commentary
Both bond watchdogs and analysts are on high alert. Highlighted is the commentary by Raphael Thuin, Head of Capital Markets Strategies at Tikehau Capital entitled "France enters a zone of political turbulence after the rejection of the Bayrou government".
Summing up the situation facing Paris, with the National Assembly yesterday, Monday, September 8, putting an end to the Bayrou government by refusing to grant a vote of confidence, thus ushering in a new phase of political uncertainty in France, Thuin noted that "although this scenario had been anticipated by some investors, the coming days will be crucial for assessing the country’s ability to stabilize its political framework and reassure markets about its fiscal trajectory."
The head of Tikehau Capital’s capital markets strategies division spoke of a "political horizon marked by inertia and prudence," stressing that, "in the short term, no party seems capable of reconciling the fiscal discipline program expected by the markets, particularly bond investors, with the political capital needed to implement it."
The alert, however, is not complete:
“However, the risk of a massive slide in public finances appears limited: a parliamentary majority remains in favor of deficit reduction, even if divisions between parties hinder its concrete implementation. In this context, the most likely scenario remains a prolongation of the current instability. Deficits are expected to remain high, with no clear prospect of reduction, while political immobility could consolidate. This situation, however, should not lead to a sudden economic disruption. The fundamentals of the French economy, although weakened, remain resilient, and the status quo could prevail in the coming months.”
That said, looking at the longer-term outlook, the expert identified the risk that France will “navigate for a long time between political gridlock and the slow deterioration of its economic fundamentals .”
The truth is, therefore, that "while no sudden shock is expected in the short term, the accumulation of uncertainties could, in the medium term, weigh on the country’s growth and credibility."
The note concludes by emphasizing that "the possibility of breaking out of this impasse will depend as much on internal decisions—particularly the ability to form a stable government—as on investors’ patience with adverse dynamics that erode national credibility."
Focus also on the commentary by Thomas Gillet, director of Scope Ratings’ Sovereign and Public Sector division, who emphasized that "the collapse of the French government, the second in less than a year, is a credit negative for France," whose rating and outlook are assigned by Scope at AA- and stable, respectively.
The fall of Bayrou’s government, Gillet explains, "exacerbates the country’s political instability and debt challenges," given "the large deficit, amounting to 5.8% of GDP in 2024, and the rising debt trajectory."
For Gillet, Paris’ debt-to-GDP ratio will continue to grow, "surpassing the 120% threshold in the coming years, exceeding 113% of GDP in 2024, which is already 15 percentage points higher than in 2019."
Gillet’s expert concludes his note by warning that, considering both scenarios of a new prime minister appointed by French President Emmanuel Macron—who would be the fifth in four years—and new elections, the second in two years, "the fragmented political context, growing political polarization, and the electoral calendar are all factors that work against a political compromise on budget reforms, which increases the risk of a political impasse and weak public finances in the medium term."
Original article published on Money.it Italy 2025-09-09 09:57:00. Original title: Spread Italia-Francia si azzera dopo crollo governo Bayrou
