The French government is on the brink of collapse, and investors are preparing for a volatile week of trading, with some seeing opportunities amid the chaos. The difference between French and German government bond yields has risen to 85 basis points recently—the highest in more than 10 years—due to fiscal and political tensions in Paris.
The Oat-Bund spread, as these sovereign bonds are known, reflects negative sentiment toward French government bonds compared to German ones. Despite this, absolute yields for both countries have fallen steadily over the last month as the European Central Bank has cut rates and indicated further monetary easing ahead.
This week, the left-wing alliance and far-right Rassemblement National (RN) tabled a motion in Parliament to topple Prime Minister Michel Barnier's government after he announced plans to enforce social security cuts without a vote. If successful, Barnier would become France's shortest-serving prime minister in modern history.
"Re-emerging fiscal tensions in France don't bode well for the euro as foreign inflows into French bonds could deteriorate rapidly from here," said UBS strategists led by Vassili Serebriakov.
If a vote of no-confidence passes, there will be significant implications. Alex Everett from abrdn noted that if President Emmanuel Macron resigns following such an event, bond yields could worsen dramatically. However, if Macron remains in power despite losing confidence, spreads might widen less drastically.
"If Macron does resign... you probably could get extremely violent moves," Everett told CNBC Pro.
Everett's fund anticipates further declines in French government bond prices while favoring Dutch and Spanish bonds instead. Analysts at Metzler Research suggest that any new government would face similar challenges due to complex parliamentary distributions.
"A budget resolution at the second attempt seems hardly more likely to us," said analysts led by Leon Ferdinand Bost at Metzler Bank.
Some view the no-confidence vote as a negotiating tactic by RN to secure concessions on Barnier’s budget rather than genuinely seeking governmental change. Everett expressed skepticism about RN's motives:
"I'm a little bit skeptical as to the value for RN for causing [the] government to fall today," said Everett. "They're agents of chaos for little political end."