LIVE MARKETS-Ignore fundamentals, French bonds can keep rallying, SocGen says

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IGNORE FUNDAMENTALS, FRENCH BONDS CAN KEEP RALLYING, SOCGEN SAYS,

French government bonds, or OATs, have outperformed meaningfully since mid-January when it emerged the government would be able to push a budget through parliament, and there's more to come, analysts at Societe Generale say.

The gap between French and German yields has dropped from around 70 basis points for much of the first half of January to around 56 bps on Friday, DE10FR10=RR as some political risk has come out of French debt.

And SocGen's constructive view on OATs is based on the fact this political stability looks set to continue, at least until the run up to the 2027 French presidential elections.

Less political stress and lower OAT volatility could drive reallocations back into French debt, given how many portfolio managers have been underweight French bonds in the past, they said.

And at least for now, higher French yields are still offering investors 'carry' over many other European bonds, even if this will reduce if OAT prices keep rallying.

Notably, SocGen's optimism comes even though they don't see the French economic situation improving any time soon.

"France’s medium‑term fundamentals remain challenging. The government’s 2026 deficit target of 5% is prone to minor slippage; our economists see 5.2% as the baseline," say they write adding a Moody's downgrade in April would not be a surprise.

However, much of this seems to be in the price already.

(Alun John)

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