Bond vigilantes gun for France’s triple A

Fresh from claiming Silvio Berlusconi’s cosmetically enhanced scalp, and with Spanish yields firmly back above the painful 6 per cent threshold ahead of elections on Sunday, bond vigilantes are gunning for France’s prized triple A rating.

While German Bunds and UK Gilts benefit from risk aversion, French bonds now trade as a risky asset along with the peripheral eurozone names – despite the fact that the 10-year note still yields a relatively modest 3.4 per cent.

The spread over comparable Bunds hit a record last week, and is once again creeping up, to 163.4 basis points on Monday. Other financial indicators are also flashing orange.

France is now the world’s largest market for single-name credit-default swaps, with a net outstanding of $23.8bn according to the Depository Trust & Clearing Corporation. Just a year ago, it was the third largest, with only $15.7bn net outstanding. The price of French CDS has also crept up, to a record 208 bps on Monday, according to Markit.

On Thursday, France plans to auction €6-7bn of short-term bonds, and €800m to €1.2bn of inflation-linked notes. Policymakers may urge sang-froid, but the temperature is clearly rising in France’s €1,300bn bond market.