(Bloomberg) -- French government debt extended a rally on speculation the nation’s fractious parliament will eventually strike a deal on next year’s budget.
The yield on 10-year government bonds fell for a fourth day, driving the spread over safer German securities to below 73 basis points. That’s a level last seen on Nov. 19, when fears that far-right leader Marine Le Pen would vote to topple the government over its fiscal plans first started to surface.
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The move picked up momentum on Thursday after Le Pen said in an interview with Bloomberg TV that a budget could be delivered in “a matter of weeks” so long as the next prime minister is prepared to narrow the deficit more slowly.
While Le Pen’s party provided the votes that ended Michel Barnier’s government in a no-confidence motion this week, investors are taking their cues from the National Rally leader’s budget overtures.
“It looks like Marine Le Pen is what drives the French bond market these days,” said Benoit Gerard, a rates strategist at Natixis SA.
The repricing is the latest twist in France’s fraught political drama, where the lack of a majority has imperiled the government’s ability to trim its ballooning deficit. The impasse has weighed heavily on the market, pushing the country’s borrowing costs to 90 basis points over Germany’s last week, the most since the euro-area’s debt crisis.
Attention now turns to how a deal could be agreed while questions over Emmanuel Macron’s presidency still abound, even after he vowed to serve out the remainder of his term. A poll by Cluster17 for Le Point magazine this week showed a majority of French people want him to resign.
Macron said the new government’s priority will be approving a budget, with a special law submitted to parliament before mid-December to keep the state running in the interim. But any new premier will face the same political gridlock that ousted Barnier.
As a reminder of the urgency to reach a deal, Moody’s Ratings said the toppling of the government was credit negative. A new prime minister would likely face the same difficulties as Barnier, potentially ushering in new political crises, the credit agency said.
(Updates with background, pricing throughout.)
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