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(Bloomberg) — Japanese investors sold French sovereign bonds en masse in July, a sign that one of Europe’s safest assets has been tarnished in the eyes of some of its biggest holders.
The funds offloaded ¥1.32 trillion ($9.2 billion) of French government securities in July, the biggest monthly decline in more than four years, the latest balance-of-payments data from Japan’s Ministry of Finance show.
Their allocations can have an outsized impact on a market that is heavily reliant on foreign demand. More than half of France’s government debt is held by overseas investors, according to the latest Bank of France data.
“We suspect Japanese investors are reassessing their relatively large proportion of holdings in semi-core” in favor of euro investment-grade credit, supranational bonds and “maybe, in the not-too-distant future, peripherals,” said Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International.
President Emmanuel Macron’s decision to hold a snap election this year sent markets into tailspin on concern the nation will struggle to rein back its deficit. The shortfall swelled to 5.5% of gross domestic product in 2023, prompting S&P Global Ratings to downgrade the country and the European Union to instigate a procedure to enforce greater fiscal discipline.
While a new prime minister was appointed this week, no single party commands a large enough majority to rule alone. Bank of France Governor Francois Villeroy de Galhau meanwhile called for efforts to cut spending as well as “overcoming the taboo” on raising taxes to repair the country’s finances.
At the height of the market turbulence in June, the spread between French and German 10-year yields rose to 86 basis points as investors balked at the prospect of unbridled spending should either the far-right or the left win a majority. It was trading at 72 basis points on Tuesday.
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