Moody’s Maintains France’s Rating, French Bond Sell-off Temporarily Pauses

(1) The sell-off in French government bonds temporarily eased on Monday, after Moody's did not downgrade the country's sovereign credit rating and weekend protests did not trigger the same level of social unrest as the previous week, helping to repair market sentiment. (2) The yield on France's 10-year government bonds fell by 4.5 basis points to 4.976%, after reaching 5.1415% last Thursday—the highest level since June 2002. (3) The spread between German and French 10-year government bond yields narrowed by 5 basis points to 161 basis points; previously, that spread hit its widest level since 2011 last week, showing that after the rating pressure eased, the relative appeal of French bonds has recovered. (4) Moody's maintained France's sovereign credit rating at Aa3 last Friday evening, bringing some relief to the French government; the rating is based on the assumption that France will implement deficit-reduction budget plans in 2027, while financing costs and social tensions will ease over the next few months. (5) According to Commerzbank interest-rate strategists, after Moody's unexpectedly temporarily maintained the rating, French government bonds are expected to benefit further from the temporary relief of rating pressure, and this easing momentum could continue ahead of the European Central Bank's policy decision. (6) The European Central Bank will announce its latest monetary policy decision on Thursday, and the market generally expects it to keep the deposit rate unchanged. The focus will be on President Lagarde's assessment of the economic outlook and the ECB's concern over sell-offs in bonds issued by France and other high-debt eurozone countries. The market is increasingly worried that the ECB is paying more attention to the negative effects of rising long-term yields. (7) As the benchmark for the eurozone, the yield on Germany's 10-year government bonds rose by 1.5 basis points to 3.357%, while the two-year German government bond yield—which is sensitive to changes in policy expectations—rose by 2 basis points to 3.049%. (8) Last week, as global investors began to question the sustainability of massive capital expenditures related to artificial intelligence data center construction, German government bonds became one of the main beneficiaries of safe-haven inflows. Going forward, attention will be paid to whether the ECB's stance on rising long-term yields will affect the spread trend for high-debt countries.