French government bond yields stayed near 24-year highs on Tuesday as protest groups called for more demonstrations. Strategists say further disruption could add to the pressure on an already weakened economy.
French government bond yields remained near 24-year highs on Tuesday after their biggest daily rise in nearly a month. Trading was volatile as French protestor groups called for further demonstrations following last weekend's unrest.
French yields hover just below the October peak
French OAT yields were last down 3 basis points at 4.88%, after a session high of 4.9877%. That fell slightly short of the early October peak of 4.9937%, the most since July 2002.
The premium of OAT yields over German Bunds, the benchmark for the wider euro zone, widened by about 2.5 bps to 150 bps. That points to French debt underperforming German debt. The gap had reached 158.67 bps in early October, its highest since November 2011.
Strategists weigh protests and politics
Goldman Sachs strategists said they think the direct economic effects are likely to remain limited for now. They added that further disruption could weigh on an economy already hit by tighter financial conditions, elevated political uncertainty and contractionary fiscal policy.
Benjamin Schroeder, senior rates strategist at ING, said the protests show "any government will struggle to implement the required reforms and savings against broader public resistance".
Politics adds to the uncertainty. Marine Le Pen and Jean-Luc Melenchon extended their lead over other candidates in a poll published last week, a scenario analysts view as the least favourable for efforts to reduce France's fiscal deficit.
Bund yields track energy prices and ECB bets
Euro zone benchmark Bund yields edged lower but stayed within their recent range. Persistent energy price pressures kept investors from scaling back bets on further European Central Bank rate increases.
Analysts said it will be difficult to materially reduce the market's bias towards further rate hikes because a credible decline in energy prices remains elusive.
Germany's 10-year yield was down 7 bps at 3.385%. The 2-year yield, which is more sensitive to policy rate expectations, fell 5 bps to 3.045%.
Source: Investing.com
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