French debt risk premiums versus safe-haven German Bunds fell on Friday, after French President Emmanuel Macron said he would appoint a new prime minister in the coming days and his top priority would be getting a 2025 budget adopted by parliament.
The gap between French and German yields DE10FR10=RR – a gauge of the risk premium investors demand to hold French debt – fell to 73.50 basis points, its lowest since Nov. 21. It was last down 3.5 bps at 74.50 bps.
Michel Barnier, a veteran conservative, became the shortest-serving prime minister in modern French history when he resigned on Thursday after parliament voted him out over his fiscal plans, barely three months after he was appointed.
Investors have worried that the most likely outcome of the resulting political crisis was the extension of the 2024 budget to 2025, implying a less restrictive fiscal policy threatening the ability of the government to curb a burgeoning deficit.
Far-right National Rally (RN) leader Marine Le Pen, who voted to oust Barnier, said on Thursday she had no plans to seek the removal of Macron and a budget could be passed within weeks.
"Her comments suggest the political deadlock may not be as stuck as suggested over the past few days," said Michiel Tukker, senior European rate strategist at ING.
"Of course, these are just words, and reaching a credible government budget that satisfies Le Pen's party will prove a challenging task."
According to Tukker, "the spread tightening was felt more broadly throughout rates markets", also affecting Italian BTPs and Spanish Bonos.
JOINT FUNDING PROSPECTS
The yield spread between BTPs and Bunds DE10IT10=RR dropped to 105.40 bps on Friday, its lowest level since October 2021. It was last down 1 bp to 107.60 bps.
"BTPs are taking another major leap as prospects of more joint funding on the European level for defence is boosting the convergence trade," said Michael Leister, strategist at Commerzbank.
Yield spreads have tightened on market hopes for joint issuance from the European Union, which could fund growth and ease the debt burden for over-leveraged economies.
EU countries are discussing a 500 billion euros joint fund for common defence projects and arms procurement, tapping bond markets to boost spending in anticipation of Donald Trump's White House return, the FT reported on Thursday.
Meanwhile, euro area benchmark Bund yields were on track for their first weekly rise in more than a month after reaching 2% on Monday as markets await key U.S. data later in the session.
U.S. payrolls could affect expectations for the Federal Reserve monetary easing path.
Germany's 10-year yield DE10YT=RR rose 0.5 bps to 2.11% and was set to end the week 2 bps higher.
Markets await the European Central Bank policy meeting next week, with investors fully pricing a 25 bps rate cut and no chance of a 50 bps move, while focusing on the rate outlook.
Many think the central bank will have to cut below the neutral rate as inflation risks falling below target.
The neutral rate – which many analysts see at 2% - is the theoretical interest rate that would keep the economy operating at full employment and stable inflation.
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An unusual weather pattern known as an omega block is at the heart of the extreme heat sweeping across Europe. The phenomenon can trap hot air over the same region for days or even weeks, allowing temperatures to climb to dangerous levels.
As France endures a record-breaking heatwave that has been linked to at least 40 drowning deaths, forecasters are using three key terms - pic de chaleur, vague de chaleur and canicule. Here's what they mean.
Authorities in France are reporting that about 20 people have died over the weekend while swimming in unsupervised areas of rivers, lakes and coastal waters as they tried to escape the heatwave.
Attendees at undeclared free parties in France could face on-the-spot fines of €1,500 ($1,713) or up to six months in prison under proposed new legislation currently being reviewed by the French National Assembly.
Tehran has agreed to let the International Atomic Energy Agency (IAEA) recommence inspections of its nuclear programme, U.S. Vice President JD Vance has said. The U.S. and Iran have settled on a 60-day roadmap aimed at reaching a final deal, according to mediators Qatar and Pakistan.
A Ukrainian strike has damaged a school building in a Russian-controlled area of Ukraine’s Zaporizhzhia region, according to local authorities cited by the TASS news agency. No injuries were reported in the incident.
Israel's defence minister said on Wednesday Israeli troops will not withdraw from southern Lebanon, highlighting a hurdle to Iran-U.S. peace talks, as the top U.S. diplomat tours the Middle East to win over allies sceptical about a proposed deal.
U.S. President Donald Trump said that Iran had agreed to nuclear inspections into "infinity, despite Tehran's denials, and that unfrozen Iranian assets would be used to buy humanitarian supplies from the United States.
Authorities in France are reporting that about 20 people have died over the weekend while swimming in unsupervised areas of rivers, lakes and coastal waters as they tried to escape the heatwave.
Turkish President Recep Tayyip Erdoğan has said he will “most likely” hold bilateral talks with U.S. President Donald Trump during next month’s NATO summit in Ankara, where the American leader is expected to attend.
Russia has called for clarification on whether U.S. President Donald Trump has changed his position on the war in Ukraine following remarks made at the recent G7 summit in Evian-les-Bains.
The European Union and Taliban officials held talks in Brussels on Tuesday on consular services and the situation of Afghans whose asylum applications have been rejected in Europe.
China’s anti-corruption authorities have launched an investigation into Bian Zhigang, a senior defence and space official, over suspected serious violations of discipline and law, officials said on Wednesday.
Alibaba, one of the world's largest technology and e-commerce companies, has sued the U.S. Pentagon after being added to a blacklist of firms it claims support China's military, escalating a dispute with potentially significant consequences for the company.
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