French Bond Yields Surge Amid Election Outcomes

French government bond yields hit their lowest premium to German debt in a month before reversing course due to a hung parliament forecast from recent elections. The uncertainty led to broader implications across European bond markets, with significant movements in both French and Italian 10-year yields.

French government bond yields briefly hit their lowest premium to German debt in almost a month on Monday, following Sunday's election that forecasted a hung parliament in the euro zone's second-largest economy. The yield on France's benchmark 10-year bond increased by 3 basis points to 3.244%, having retreated from a high of 3.37% last week.

Meanwhile, German 10-year debt remained stable at 2.536%, widening the gap between French and German yields by 3.25 basis points to 71.15 basis points. This spread briefly reached a session low of 63.7 basis points, the smallest since June 13. According to Commerzbank rates strategist Rainer Guntermann, a hung parliament in France heightens political gridlock risks, suggesting that the early rally in French bond prices may not be sustainable.

'The OAT risk premium is likely to persist and cross-country spreads will remain in motion,' Guntermann stated. Two weeks ago, French spreads expanded to as much as 85 basis points, the widest since 2012, due to investor concerns over potential far-right or far-left majority outcomes and their implications for spending policies.

In other markets, Italian 10-year yields rose by 2.2 basis points to 3.96%, with the gap between BTPs and Bunds narrowing by 0.8 basis points to 140 basis points.

(With inputs from agencies.)