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(Bloomberg) — A measure of France’s bond risk fell amid hopes lawmakers will strike a deal on next year’s budget sooner than many investors had expected, ending months of political impasse that has weighed on markets.
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The extra yield investors demand to hold 10-year French notes over safer German peers dropped as much as seven basis points to 77 basis points, the lowest in two weeks. The move was compounded by losses in German bonds as demand for haven assets waned, as well as low trading volumes.
Far-right leader Marine Le Pen said in an interview with Bloomberg TV that a budget could be delivered in “a matter of weeks” so long as the next prime minister is prepared to narrow the deficit more slowly. Le Pen’s party on Wednesday voted to topple Michel Barnier’s government and investors had been bracing for a long period of political instability until a new budget plan is agreed on.
“A relief rally was always possible,” said Robert Dishner, senior portfolio manager at Neuberger Berman. “Ultimately the risk is spreads re-widen due to supply concerns.”
Le Pen also said there was no case for President Emmanuel Macron to resign. Speaking later in Paris, Macron said he would serve out his term, which ends in 2027, and name a new prime minister in the coming days who can prepare a new budget by early next year. But any new leader will likely face the same financial squeeze that brought down the previous administration, and there is a lot of skepticism among investors over how quickly the various parties can reach a deal.
“I would not read too much between the lines,” said Benoit Gerard, a rates strategist at Natixis SA. “Yes, we can have a budget quickly, if the new government minds complying with the National Rally requirements. Not sure they will get much support from the central bloc.”
The outgoing administration will continue in a caretaker capacity for the time being, allowing the government to avoid a US-style shutdown that brings most services and spending to a halt. Once named, a new prime minister will propose a cabinet, appointed by the president, and then has to send a new 2025 budget bill to parliament by Dec. 21.
S&P Global Ratings said in a statement on Thursday that it sees a “low” chance of an amended 2025 budget plan to be passed by the deadline in December. The firm, which rates France at AA- with a stable outlook, added it sees “considerably less” fiscal consolidation after Barnier’s government fell.