Euro Area Bond Markets React to French Political Turmoil and Japanese Economic Shifts
Short-dated borrowing costs in the euro area decreased, and the yield spread between French and German bonds widened following French Prime Minister Sébastien Lecornu's resignation. Markets are anticipating potential political changes in France and observing broader economic shifts in Japan that affect global bond yields.
On Monday, short-dated euro area borrowing costs decreased, and the yield spread between French OATs and German Bunds widened after French Prime Minister Sébastien Lecornu stepped down. Market watchers are closely monitoring the situation in France, anticipating the possibility of a snap election, with the far-right Rassemblement National likely to play a leading role in the next government.
Meanwhile, ultra-long government bond yields in Germany adjusted after initial gains, prompted by expectations of expansionary economic policies in Japan, where 30-year borrowing costs hit record highs. Markets also noted a slight increase in bets on future European Central Bank rate cuts following Lecornu's resignation. Traders are pricing in a 40% chance of a 25 basis-point ECB rate cut by July.
Experts suggest that even with a new French prime minister appointed, political stalemates will continue to impact market dynamics. As concerns grow over France's fiscal outlook, the yield gap between German Bunds and French bonds has reached its highest level since January, indicating increased risk premiums demanded by investors.
(With inputs from agencies.)
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