German bond yield curve steepens bullishly, France-Germany spread widens again

⑴ On Tuesday, the yield curve of core Eurozone government bonds showed a bull steepening. The German 2-year yield fell by about 3 basis points on the day, the 2-year to 5-year curve steepened by about 1 basis point, and the 5-year to 10-year and 10-year to 30-year segments each steepened by about 1 basis point. ⑵ The spread between French 10-year government bonds and German bonds of the same maturity widened again by about 6 basis points that day, after having narrowed noticeably the previous day, once again highlighting the relative weakness of French bonds compared to German bonds. ⑶ Moody's maintained France’s rating unchanged last Friday, but its accompanying statement was interpreted as leaving room for further action; if the French parliament fails to pass a budget that reduces the deficit, or if a no-confidence vote brings down the government and hence prevents the budget from being implemented by decree, a downgrade of France’s rating at an opportune time cannot be ruled out. ⑷ This statement heightened market concerns about France’s fiscal path, causing French bond risk premiums to rise. Funds favored German bonds and other core instruments, driving German bond yields lower, and the curve to steepen. ⑸ Going forward, attention will focus on the progress of French budget negotiations and parliamentary political developments. If fiscal consolidation is obstructed, the France-Germany yield spread may widen further, and the divergence between core and semi-core Eurozone bond markets may continue.