Government bonds and government crisis in Paris: why the market is selling

On the one hand, the rise in the yields of some European government bonds, particularly French ones. On the other, the fall of the euro. These are - broadly speaking - some of the most relevant financial dynamics in yesterday's market session. A day where the 'la' to the dances was given by the Land of the Rising Sun. The probable nomination of Sanae Takaichi as Prime Minister of Japan - together with the Nikkei's rise (+4.75%) - pushed up several government yields. The reason? Because Takaichi's programme envisages - although the future leader professes to be an avid Takaichian - massive public spending and the call for an expansive monetary policy. 'Faced with this,' explains Antonio Cesarano, chief head strategist at Intermonte, 'European investors, who have been dealing with the issue of rising public debt in the Old Continent for some time, reacted by driving down the prices of government issues'. Then in the morning came the news of the resignation of French Prime Minister Sebastine Lecornu. An event which - with reference to Paris - induced a twofold impact: the descent, up to over 2%, of the Cac 40 and the increase in government bond rates. The 10-year maturity was hovering around a yield of 3.5% at the start of the session. As soon as the agencies broke the news of the failed attempt to create the new executive, the French government bond rate jumped to close to 3.6 per cent and then retraced slightly. 'This is a reaction,' explained Tullio Grilli, head of electronic brokerage at Banca Akros, 'linked to the specific situation in Paris. The high public debt and political uncertainty are, inevitably, priced in by investors' who demand a higher risk premium for the transalpine chaos. The danger, as things stand, does not seem to translate into a contagion effect. 'Comparing the performance of the French government bond with that of, for example, Italy, one can see that the dynamics diverge'. Not so much in the last session, where the BTp itself was marked by a slight increase in the rate. How much, rather, in the medium term. The Italian government bond, at the beginning of 2025, had a yield of around 3.5 per cent 'and currently the rate is staying at those levels'. Quite different, however, is the narrative for the Oat. "Here the yield was 3.2 per cent at the end of 2024 and is now at higher levels". On closer inspection, the story is somewhat replicated in Berlin. "The ten-year bund yield, again at the beginning of the year, was worth 2.37%. This morning it reached 2.7%'. A trend which is due - also - to the German public spending increase programme. Well: such trends show that so far 'the risks that the market sees with reference to Germany and France must remain confined to those countries'.