French government bonds rebounded sharply Tuesday morning. The 10-year OAT yield dropped 8bp to 4.7824 percent after energy prices fell, easing the second energy-supply shock that ECB chief economist Philip Lane had flagged the prior day. Against a German 10-year Bund at 3.478 percent, the implied OAT-Bund spread sat near 130bp in morning trade, well off Monday’s 152bp intraday record.
Politics did the rest. Marine Le Pen increased her planned spending cuts to 140 billion euros from 125 billion if she wins the 2027 presidential election, a pledge aimed at bond investors after Banque de France Governor Francois Villeroy de Galhau warned France risks being “strangled by interest rates.” The euro rebounded about 0.28 percent to $1.1264 while the dollar index fell 0.26 percent to 101.89.
The calm is fragile. Demonstrations are planned in France on Tuesday, and no budget has been passed: the first legislative act on the French budget is scheduled for Thursday, October 8, the next hard test of whether markets accept Le Pen’s arithmetic.