The Lombard Review
Markets & Finance

Macron's gamble spooks French bond markets

Fiscal policy risk reprices spreads

The U.S. Treasury Building, Washington
The U.S. Treasury Building, WashingtonPhoto: MeanieHyaena / Wikimedia Commons, CC BY 4.0
1 min read Data: Election called 9 Jun

Emmanuel Macron’s shock decision to dissolve the National Assembly and call snap parliamentary elections following a crushing defeat in European elections sent European sovereign debt markets into an immediate panic. The yield spread between French ten-year OATs and German Bunds experienced its most violent blowout in a decade.

The White House from Lafayette Square
The White House from Lafayette SquarePhoto: DJTechYT / Wikimedia Commons, CC BY-SA 4.0

The Sovereign Spread Shock

Investors fear that a potential victory by Marine Le Pen’s National Rally or a left-wing coalition will lead to fiscal profligacy, repealing pension reforms and expanding public deficits in defiance of European Union fiscal rules. France is already running a deficit exceeding 5.5 per cent of GDP; injecting political chaos into an already fragile fiscal trajectory has permanently raised the sovereign risk premium on French debt.

A supermarket aisle in Vermont
A supermarket aisle in VermontPhoto: Tessa Bury / Wikimedia Commons, CC BY 4.0

Macron’s snap election gamble shattered fixed-income complacency, forcing bond markets to price a substantial political risk premium into French sovereign liabilities.