Euro zone bond yields steady; France dented by downgrade

Euro zone government bond yields got off to a steady start on Monday, with French debt lagging after credit ratings agency Fitch cut France's long-term rating on Friday, as the country grapples with a slowing economy and ballooning debt.

This week is packed with macro risk events, including rate decisions from the U.S. Federal Reserve, the Bank of England and the Bank of Japan, all of which could help shape investor appetite for euro zone debt. French 10-year notes were up 1 basis point for a yield of 3.516%, compared with a slight dip in benchmark German yields to 2.708%. The premium investors demand to own French, rather than German bonds, traded above 80 bps on Monday, having risen from around 65 bps in the last month, as a vulnerable French government headed towards last week's confidence vote.

President Emmanuel Macron last week named loyalist Sebastien Lecornu as France's fifth prime minister in under two years, after predecessor Francois Bayrou was toppled in the parliamentary confidence vote over the government's hugely unpopular budget. Fitch cut France's rating by one notch to A+ late on Friday.

"Our main worry for France comes from the upcoming rating actions from Moody's and/or S&P. Currently, Moody's and S&P both have France as AA-," Jefferies strategist Mohit Kumar said. "If political uncertainty lingers, there is a risk of at least one more downgrade. If France falls below AA- from two or more rating agencies, we could see some forced selling from institutional accounts. We remain negative on France spreads."

The European Central Bank last week left euro zone rates unchanged, as expected, and lowered its longer-term inflation projections. In an interview with the Financial Times published on Monday, newly appointed Austrian central bank governor Martin Kocher said the ECB was likely at, or very close, to the end of its easing cycle, a view echoed by euro zone derivatives markets.

In addition to the slew of central bank policy decisions, there is a hefty amount of new debt coming to market this week. Germany, France, Spain, Slovakia, Greece and Finland all hold auctions, for a total of 28 billion euros ($32.81 billion) in supply, according to Commerzbank estimates. ($1 = 0.8533 euros)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)