French Government Bonds Get Worse Deal Than LVMH... "Risk-Free" Formula Shaken [Click e-Market]

Fiscal Deficit and Political Uncertainty
French 10-Year Government Bond Yield Tops 4.9%

In a rare development in European bond markets, yields on French government bonds have risen above those on corporate bonds issued by leading French companies such as L'Oréal and LVMH. The combination of a widening fiscal deficit and political instability has led to assessments that French government bonds are effectively being valued by the market like credit-risk bonds rather than “risk-free assets.”

According to Daishin Securities on Oct. 29, researcher Gong Dong-rak said on Oct. 28, “The conventional view is that government bonds are risk-free assets with the highest credit quality in a country, while corporate bond yields are set above government bond yields to reflect companies’ credit risks and other factors. This formula is breaking down in France,” he said.

A protester waves a French flag to denounce rising prices in Strasbourg, France, on the 24th (local time). AP-Yonhap News

Government Bond Yields Rise Above Those of L'Oréal and LVMH Corporate Bonds

As of Oct. 28, the yield on France’s 10-year government bond (OAT) stood at 4.9174%. By contrast, corporate bonds with similar maturities traded at 4.2% for L'Oréal, 4.287% for LVMH and 4.457% for TotalEnergies. In effect, government-issued bonds now have to offer higher yields than corporate bonds from major domestic companies to attract investors.

France’s deteriorating fiscal position and political uncertainty are cited as the main causes. The yield spread between French government bonds and German government bonds, the eurozone benchmark, has widened from 60–70 basis points (1 bp = 0.01 percentage point) at the start of this year to more than 150 basis points recently. By contrast, yields on corporate bonds issued by major French companies have remained relatively stable.

Gong said French government bonds are already being treated by the market like “credit-risk bonds.” Investors are factoring the French government’s fiscal position and political situation into yields in much the same way they assess a company’s financial condition, and are demanding higher yields than those offered by blue-chip companies.

In the Eurozone, German Government Bonds Are the “True Risk-Free Asset”

This phenomenon is linked to the eurozone’s single-currency structure. Unlike the United States or the United Kingdom, France cannot issue its own currency to support repayment of its government debt. The authority to issue currency rests with the European Central Bank (ECB).

As a result, German government bonds, backed by the eurozone’s strongest fiscal position, effectively serve as risk-free assets and as the benchmark for determining yields. French government bond yields are structured around German government bond yields, with a “sovereign credit risk premium” added to reflect France’s fiscal and political risks. Gong said this is similar to how spreads are added to bonds issued by local governments or public corporations relative to Korean Treasury bonds.

He also said the ECB is unlikely to step in immediately to buy French government bonds just because their yields have surged. If a central bank intervenes to lower the credit spread of a particular country, it would be directly influencing the market’s assessment of country-specific risks.

“We should watch for a situation in which rising French government bond yields trigger aversion to euro-denominated bonds more broadly, or push German government bond yields higher as well,” Gong said. “More intuitively, if the euro’s value fluctuates sharply in the foreign exchange market, the ECB could have a clearer justification for actively purchasing government bonds.”

This content was produced with the assistance of AI translation services.