The Lombard Review

Macron's gamble spooks French bond markets

Fiscal policy risk reprices spreads

United States Treasury Washington DC 5383075936 o
United States Treasury Washington DC 5383075936 o Photo: Tony Webster/Wikimedia Commons · CC BY-SA 3.0
By The Lombard Review
1 min read

Key dataElection called 9 Jun

Emmanuel Macron’s shock decision to dissolve the National Assembly and call snap parliamentary elections following a crushing defeat in European elections sent European sovereign debt markets into an immediate panic. The yield spread between French ten-year OATs and German Bunds experienced its most violent blowout in a decade.

Aerial view National Mall , Washington, D.C. From bottom right to top left, Lincoln Memorial, Reflecting Pool, World War II Memorial
Aerial view National Mall , Washington, D.C. From bottom right to top left, Lincoln Memorial, Reflecting Pool, World War II Memorial Photo: Mariordo (Mario Roberto Durán Ortiz)/Wikimedia Commons · CC BY-SA 4.0

The Sovereign Spread Shock

Investors fear that a potential victory by Marine Le Pen’s National Rally or a left-wing coalition will lead to fiscal profligacy, repealing pension reforms and expanding public deficits in defiance of European Union fiscal rules. France is already running a deficit exceeding 5.5 per cent of GDP; injecting political chaos into an already fragile fiscal trajectory has permanently raised the sovereign risk premium on French debt.

The Cove Point LNG Terminal, seen from offshore
The Cove Point LNG Terminal, seen from offshore Photo: Pburka/Wikimedia Commons · CC BY-SA 4.0

Macron’s snap election gamble shattered fixed-income complacency, forcing bond markets to price a substantial political risk premium into French sovereign liabilities.

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