LIVE MARKETS-"Not your usual French drama"

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"NOT YOUR USUAL FRENCH DRAMA"

France is facing a pivotal presidential election in 2027 and the country's finances are in dire need of repair, meaning bondholders are may be less willing to just price in future risk and move on, strategists at Barclays said. Yields on 10-year OATs are up another 2.5 basis points today at 4.684%, their highest since 2008.

Barclays says in a "globally unsettled bond market", the beta - or rate of change in yields relative to those of the German benchmark - for France has overtaken that of Italy, meaning its bonds are more volatile and spreads are more likely to widen or narrow sharply with little warning. "As such, one can infer that political risks represent only a small part of the recent large-scale widening in OAT spreads," Barclays strategists including Rohan Khanna and Lefteris Farmakis say.

The greater beta of France to other spreads mean OATs are trading more like higher-risk peripheral bonds, for starters. Rising interest rate payments are a problem for governments generally, but the adjustments France requires to its primary balances are far greater than elsewhere and Barclays say they expect large deficit pressures to extend into 2027 "that would require painful interventions to rein in." Lastly, the fragmentation of the electorate and collapse in support for traditional centrist parties means the path ahead could be even more volatile, the bank says.

"The cynical market observer would protest that we have seen this drama before and several times over, no less. Every single time, the scare has proven to be a 'buying opportunity'. Risk premia around French elections build up only to deflate," the strategists said.

"Markets do not make the same mistake repeatedly."

(Amanda Cooper)

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