France's Bond Risk Premium Decreases with Government Collapse

Following the fall of the French government, France's debt risk premium has declined from its highest level in over a decade. This change occurred as Thursday saw the spread that investors demanded to prefer French bonds over German Bunds decrease by 3 basis points to 80.90 basis points. Earlier in the week, the spread had widened to 90 basis points, marking the widest margin since 2012.

The government's downfall was triggered by a vote of no confidence against Prime Minister Michel Barnier by lawmakers from the far-right and far-left at the beginning of this week. Market observers had anticipated a moderate reaction from the market to the government's fall or even a 'buy on rumor, sell on news' behavior.

Analysts suggested that France could enter a prolonged period of crisis, potentially leading to a gradual decline in state credibility and weaker economic growth. They referred to draft budget proposals that include 60 billion euros worth of spending cuts and tax increases, aiming to reduce the budget deficit to 5.1% of GDP by 2025.

Eurozone borrowing costs showed a slight increase as investors awaited U.S. employment data that could influence the Federal Reserve's future monetary policy expectations. Federal Reserve Chairman Jerome Powell noted on Wednesday that the resilience of the U.S. economy has surpassed the central bank's forecasts made in September, indicating a potential slowdown in the pace of interest rate cuts.

Meanwhile, Germany's benchmark 10-year government bond yield rose by 2.5 basis points to 2.08%. It had fallen to 2.033% last week, marking the lowest level since the beginning of October.