The Lombard Review

Macron's gamble spooks French bond markets

The United States Treasury, Washington, D.C.
The United States Treasury, Washington, D.C. Photo: Tony Webster/Wikimedia Commons · CC BY-SA 3.0
By The Lombard Review
1 min read

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.

An aerial view of the National Mall, Washington, D.C., with the Lincoln Memorial, the Reflecting Pool and the World War II Memorial.
An aerial view of the National Mall, Washington, D.C., with the Lincoln Memorial, the Reflecting Pool and the World War II Memorial. Photo: Mariordo (Mario Roberto Durán Ortiz)/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.

Boarding of vessels and platforms by the Brazilian Navy.
Boarding of vessels and platforms by the Brazilian Navy. Photo: Marinha do Brasil/Wikimedia Commons · CC BY-SA 2.0

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

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