A tale of two bonds
Source: Euractiv
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Financial market analysts who read the flurry of headlines about France’s borrowing costs briefly surpassing Greece’s earlier this week may have been reminded of the famous opening to Charles Dickens’ A Tale of Two Cities.
“It was the best of times, it was the worst of times…”
France, whose government could collapse next week if conservative Prime Minister Michel Barnier fails to garner sufficient parliamentary support for his draconian budget, is experiencing one of the worst political crises in its modern history.
Greece, on the other hand, is enjoying a period of relative stability – certainly, it is experiencing better times than when it was at the epicentre of the eurozone crisis a decade ago.
Despite the moment’s undoubted symbolic significance, the implication of such reports – France could become the next Greece! – remains manifestly implausible.
For one thing, French borrowing costs have a long way to go to even come close to where Greece’s were over the previous decade. Yields on France’s and Greece’s 10-year bonds are currently hovering just under 3% – well below the peak of 36% reached by Athens in 2012.
For another, such comparisons ignore vast dissimilarities between the two cases. Greece, after all, was a country plagued by corruption and weak institutions, which was at the total mercy of politicians and banks in Berlin, Brussels, Frankfurt and Paris. (In many ways, it still is.)
France, on the other hand, has a diversified economy, strong institutions, and a president who, although weakened, is in no way beholden to the EU. (Indeed, he still purports to lead it.)
Moreover, it is still perfectly conceivable that Barnier’s budget will pass. On Thursday, the former EU commissioner scrapped plans to increase taxes on electricity – a core demand of Marine Le Pen’s far-right Rassemblement National, which holds just under a third of the seats in the country’s National Assembly.
Le Pen, admittedly, has demanded further concessions – but nobody should rule out the possibility that Barnier, a skilled politician who led the EU’s Brexit negotiations, could strike a deal over the coming days.
A tale of two (more) bonds
Indeed, the incessant comparison between France and Greece arguably represents a distraction from two far more significant bond market developments over the past week.
First, yields on US treasuries have fallen dramatically since president-elect Donald Trump’s decision last Friday (22 November) to nominate hedge fund executive Scott Bessent as Treasury Secretary.
Investors had previously bet that the policies of the self-proclaimed “Tariff Man” would be inflationary, thereby forcing the US Federal Reserve to maintain higher rates for longer – thus pushing up bond yields.
Bessent, however, has downplayed the possibility that Trump will implement tariffs, suggesting instead that it is part is a broader negotiating strategy.
“The tariff gun will always be loaded and on the table but rarely discharged,” he wrote to clients in January.
Bessent’s appointment could have significant implications for Europe: although Trump’s tariffs would likely harm EU exporters, one of their potential benefits would be a stronger dollar, which would weaken the competitiveness of US exports vis-à-vis the EU’s. Bessent’s nomination makes this possibility less likely.
Second – and in another “bond-crossing” scenario – the interest rate on Chinese bonds today (29 November) fell below Japan’s. This has been interpreted as a sign that weak demand and low inflation, or potentially deflation, could become entrenched, forcing Beijing’s central bank to further cut rates.
This is another crucial development: weak domestic demand makes it less likely that Chinese consumers will absorb the country’s “excess capacity”. This, in turn, makes it more likely that Chinese exports will be dumped on European markets – further exacerbating the EU’s industrial woes.
So, will the dollar depreciate? Will China refuse to enact fiscal stimulus? And will the French government collapse? Perhaps.
However, one should always be wary of assuming that financial markets are predictively successful – or even rational.
In other words – and to stick to the Dickensian theme – one should not be afraid to proclaim: “Bah! Humbug!”
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[Edited by Owen Morgan]
The original article: belongs to Euractiv .
