How investors are taking advantage of France’s political chaos to trade | Wilnesh News
With the French government on the brink of collapse, investors are bracing for a tumultuous week of trading, with some looking for opportunities amid the chaos. As fiscal and political tensions in Paris intensify, French and German government bond yields have risen to 85 basis points in recent days, the highest level in more than a decade. The OAT-Bund spread (the name given to the two sovereign bonds) shows the negative investor sentiment towards French government bonds relative to German government bonds. Absolute yields in both countries have fallen steadily over the last month as the European Central Bank cut interest rates and signaled further monetary easing ahead. This week, the left-wing Alliance and the far-right National Rally (RN) introduced a motion to parliament calling for the overthrow of the French government and its prime minister, Michel Barnier. Previously, Barnier said he would force social security cuts without a vote to reduce the government’s 6% budget deficit. If the newly appointed government is overthrown, Barnier will become the shortest-serving prime minister in France’s modern history. It also means that current ministers are likely to be lame ducks before France goes to the polls in July 2025, as the country can only hold elections once every 12 months. Such paralysis could mean the need for an emergency budget, with the budget deficit – reaching twice the limit set by EU treaties – likely to remain essentially unchanged for almost a year. On the current trajectory, public debt will also increase from 110% of GDP in 2023 to around 117% in 2026, pushing up long-term borrowing costs. UBS strategists led by Vassili Serebriakov said that “Renewed fiscal tensions in France do not bode well for the euro, as foreign inflows into French bonds could quickly deteriorate , as it did in July when domestic political risks erupted. Alex Everett, a bond fund manager at asset management firm abrdn, profited from short positions in France, saying that if the no-confidence vote passes, the government will collapse and investors will take advantage of France. The risk premium sought will increase, however, and the key to the severity and speed of bond price swings may depend on French President Emmanuel Macron’s next move if a breakdown in parliamentary consensus leads to Macron’s resignation. Yields could swing “extremely wildly” – worsening by 35 basis points, or the spread between oats and German bonds widening to more than 120 basis points. On the other hand, the bond fund manager added that if Macron remains in power after the no-confidence vote, the spread may widen by about 20 basis points. “If Macron does resign, it could actually lead to extremely violent actions,” Everett told CNBC Pro. “We’ll get there faster if we get to 120.” “That would create a The more violent outcome of the series, frankly, is unknown,” he added. Everett’s abrdn Euro Government Bond Fund expects French government bond prices to fall further, while favoring bonds from the Netherlands and Spain. Negotiating Tactics Given the risks posed by the collapse of Barnier’s government, some see the no-confidence vote as a last-minute negotiating tactic by the government’s political opponents. Analysts at Metzler Research believe the new government is likely to face “the same extremely complex vote distribution in parliament” as in the current setup. Macron may nominate another centrist candidate for prime minister, but budget talks will not progress further. “A second attempt to reach a budget resolution looks unlikely to us, with the risk of months of political paralysis looming,” said analysts led by Leon Ferdinand Bost at Metzler Bank. They expect bond spreads to remain at current levels. Everett, of Ebden, also echoed the doubts behind the move to overturn the government. The bond manager believes the National Alliance hopes to use the no-confidence vote as a negotiating tactic to force further concessions from Barnier’s budget and water down social welfare cuts. “I’m a little skeptical about the value of RN leading to the government’s collapse today,” Everett said. “I really don’t see how this would help RNs who desperately need to improve their cost-of-living issues.” A government collapse could lead to direct impacts on people. The problem remains unchanged and “certainly” leads to relatively high borrowing costs for France. “They are agents of chaos with little political purpose,” Everett added.
