Bond market gives Hollande benefit of doubt -- for now
French debt has record-low borrowing costs
Paris: France is weathering renewed turmoil in Europe's debt markets with record-low borrowing costs.
Higher rated than Spain or Italy and offering better returns than German securities, France finds itself in a sweet spot, drawing the strongest auction demand since the European debt crisis began in 2009 as bond investors give Francois Hollande, the country's first Socialist president in 17 years, the benefit of the doubt.
"France has certainly shown some degree of resilience and recent auctions have gone well with strong demand from French domestic investors," said Richard McGuire, a senior fixed income strategist at Rabobank International in London. "Markets are approaching Hollande with a degree of caution but no discernible alarm. His rhetoric before the election has been taken with a pinch of salt."
France's ten-year bond yields 2.739 per cent, the lowest since October 10 and down from 3.17 per cent before the April 22 first round of the presidential vote. The extra yield, or spread, investors demand to lend to France rather than Germany has declined even as German yields tumbled to a record low. The French-German spread was 133 basis points yesterday from as high as 149 points on April 20.
Falling yields
French bonds have outperformed their Spanish and Italian counterparts since the first round of the election as the resurgence of euro-region's debt crisis boosted demand for the relative safety of the securities compared to so-called periphery debt. France, which was stripped of its AAA credit rating by Standard & Poor's this year, may continue to gain from being seen as a shield against the crisis sparked by the spectre of Greece's possible exit from the euro.
"France is in much better shape than Spain or Italy," said Patrick Armstrong, a managing partner at Armstrong Investment Managers in London, which oversees $353 million (Dh1.29 billion). "I would expect outperformance versus those two on any risk aversion around viability of the euro."
At its bond sale last week, France sold benchmark five-year debt at a record-low yield of 1.72 per cent. The average cost of medium and long-term debt sold this year was 2.23 per cent, down from 2.80 per cent in 2011 and 2.53 per cent in 2010, when it was the lowest annual level since the creation of the euro, according to debt-management body Agence France Tresor.
The bid-to-cover ratio, or the demand for French debt relative to the amount sold, was 2.43 in the first five months this year, compared with 2.38 in 2011 and 2.14 in 2010 and 2.09 in 2009. France has raised 55 per cent of the ¤178 billion ($227.4 billion) earmarked for 2012.
"Yields have come down for all highly rated countries this year," Armstrong said. "Germany can only go so low, and that may be drawing investors to France."
