(Bloomberg) -- A measure of French bond risk stabilized around the widest level since the European sovereign debt crisis amid ongoing concerns over whether the government will survive a possible no-confidence vote next month.
The gap between French 10-year rates and safer German equivalents widened as much as four basis points to 90 basis points on Wednesday, the highest since 2012, before falling back to 85 basis points. Data from BNY showed French bonds suffered the biggest weekly outflow in over two years.
Investors are worried that Prime Minister Michel Barnier may struggle to pass his the budget for next year, derailing plans to cut spending, raise taxes and curb a ballooning deficit that has irked markets.
Far-right National Rally said Wednesday its lawmakers have not yet decided if they will vote to bring down the government after threatening to do so if its budget demands aren’t met.
“The market believes the odds of a vote succeeding is a real threat,” said Benoit Gerard, rates strategist at Natixis SA. The nation’s benchmark stocks index fell to the lowest level in a year.
Barnier warned on Tuesday financial markets would face a “storm” if lawmakers reject his government’s budget proposals and vote it out of power. Citigroup Inc. strategists said Tuesday that the French spread may reach 100 basis points if that happens.
France’s bonds started to underperform early last week and BNY, the world’s largest custodian, said net outflows amounted to €1.1 billion ($1.2 billion) in the five trading sessions through Tuesday. Meanwhile, a credit gauge of the risk that the nation leaves the euro area reached a seven-year high.
The so-called swap spread, another gauge of bond risk, also rose this week in France while falling in Germany. The measure, which looks at the gap between bond yields and equivalent-maturity interest-rate swaps, shows French 10-year bonds are around the cheapest level since 2012.
Adding to the moves, data released earlier Wednesday showed France’s consumer confidence unexpectedly fell in November, an evidence of the nation’s persistent economic headwinds. Markets are also on edge ahead of a rating review from S&P Global Ratings on Friday.
Appetite to own French government bonds “is very low” given the political turmoil, said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc. “And the move seems to have plenty of momentum.”
France’s CAC 40 Index fell as much as 1.4% on Wednesday. Banks like BNP Paribas SA, Societe Generale SA and Credit Agricole SA as well as insurer AXA SA slipped. French equities are a rare developed-market underperformer this year, falling about 5% while the pan-European Stoxx 600 has climbed 5%.
--With assistance from Richard Bravo and Michael Msika.
(Updates prices, adds BNY flows in paragraphs two and seven.)
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