French debt risk premium set for slight weekly rise, focus on Macron’s moves

* Investors see no clear catalyst for further widening in French spreads absent new elections * Broader euro area fixed income market largely shrugged off France’s political turmoil * Macron to meet party leaders on Friday in bid to appoint new prime minister * Aviva says fiscal policy remains in focus, with risk of steeper curves globally By Stefano Rebaudo Oct 10 (Reuters) – The risk premium investors demand to hold French government bonds rather than safe-haven German Bunds was on track to end the week only slightly wider with all eyes on President Emmanuel Macron's efforts to steer a path out of political crisis. The broader European market largely shrugged off the renewed political turmoil in France, with the 10-year yield spread between Italian and German bonds hovering near levels seen last Friday, before French Prime Minister Sébastien Lecornu resigned. Euro area borrowing costs were set to end the week roughly unchanged, as a U.S. government shutdown and a well-telegraphed European Central Bank rate outlook left investors without clear direction. Germany’s 10-year Bund yields, the bloc’s benchmark, were 2 basis points (bps) lower at 2.68%, set for a weekly fall of 1.5 bps. “France remains a deteriorating credit story over time, and RBC BlueBay thinks that Moody’s or S&P will confirm a cut in the French rating to A over the coming few weeks,” said Mark Dowding, BlueBay chief investment officer, RBC BlueBay Asset Management. “However, there may be limited catalyst for a materially wider spread for now, in the absence of new elections,” he added, noting that the asset manager has closed its short position in OATs. The yield gap between Bunds and 10-year French government bonds was at 81.50 bps from 79 bps late last Friday. It hit 87.96 bps earlier this week, the highest level since January 13, on concerns about the French fiscal outlook. President Emmanuel Macron will convene a meeting of France's mainstream political parties on Friday after his office said late on Wednesday that he would appoint a new Prime Minister within 48 hours. The German/Italian 10-year yield spread stood at 83 bps from 84 at the end of last week. S&P will review Italy's credit rating, currently 'BBB+' with a stable outlook, late on Friday, after Fitch’s upgrade last month. Markets kept a close eye on global fiscal policy, with investors wary of a rise in long-dated yields that could trigger more curve steepening — when longer maturities climb faster than shorter ones. "We continue to see higher risk premia and steeper curves," said Vasileios Gkionakis, senior economist and strategist at Aviva Investors, referring to global markets. "The interplay of fiscal and monetary policies will have important implications for growth and inflation for the foreseeable future," he added. The spread between 10- and 30-year German bond yields — seen as more sensitive to long-term fiscal concerns — stood at 57 basis points, down from a peak of 63.5 bps in early September, the highest since July 2019. U.S. Treasury yields were lower with the benchmark 10-year yield dropping 3.5 bps to 4.11% in London trade, after rising modestly on Thursday. Germany’s 2-year yields, more sensitive to expectations for ECB policy rates, slipped 0.5 bps to 1.99%. (Reporting by Stefano Rebaudo; Editing by Kirsten Donovan)

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