French debt risk premium set for slight weekly rise, focus on Macron’s moves

By Stefano Rebaudo

Oct 10 (Reuters) - The 10-year yield spread between French government bonds and safe-haven German debt was on track to end the week slightly wider, as investors watched for signs of whether President Emmanuel Macron can find a way out of France's political crisis.

The broader European market largely shrugged off renewed political turmoil in France, with the 10-year yield spread between Italian and German bonds hovering near levels seen last Friday, before French Prime Minister Sébastien Lecornu resigned.

Euro area borrowing costs were set to end the week roughly unchanged, as a U.S. government shutdown and a well-telegraphed European Central Bank rate outlook left investors without clear direction.

Germany’s 10-year Bund yields, the bloc’s benchmark, were 1.5 basis points (bps) lower at 2.69%, set for a weekly fall of one basis point.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for ECB policy rates, slipped 0.5 bps to 1.99%.

The yield gap between safe-haven Bunds and 10-year French government bonds DE10FR10=RR — a market gauge of the risk premium investors demand to hold French debt — was at 80.5 bps from 79 bps late last Friday. It hit 87.96 bps earlier this week, the highest level since January 13, on concerns about the French fiscal outlook.

President Macron's office said late on Wednesday he would appoint a new Prime Minister within 48 hours, after outgoing PM Lecornu held two days of talks to seek a way out of France's worst political crisis in decades.

The Italian yield spread with Bunds IDE10IT10=RR was at 83 bps from 84 last Friday. S&P will review Italy's credit rating, currently 'BBB+' with a stable outlook, late on Friday, after Fitch’s upgrade last month.

U.S. Treasury yields were roughly unchanged in early London trade, after being modestly higher on Thursday.