Following a poor performance by his centrist alliance in the European parliamentary elections, French President Emmanuel Macron has called for snap legislative elections. This move has significantly heightened political uncertainty, particularly given the substantial gains by Marine Le Pen’s far-right Rassemblement National (RN), which secured a notable share of the vote.

The recent gains by the RN in the European elections introduce significant political and fiscal uncertainty into France's fixed income market. Key risks and their direct implications for French government bonds include:

• Increased Political and Fiscal Uncertainty: The RN’s platform, advocating increased public spending and opposition to key fiscal reforms such as pension adjustments, could heighten concerns about France’s fiscal discipline. This may lead to higher perceived risks associated with French government bonds (OATs), resulting in rising yields as investors demand greater compensation for perceived risks. Political uncertainty is likely to widen OAT spreads relative to other Eurozone bonds, such as German Bunds.

Chart 1: France 10-year yield hit a 2024 high.

Source: SYZ CIO Office, Bloomberg

• Potential Downgrade for Credit Rating: S&P recently downgraded France's credit rating from AA to AA-, following a similar downgrade by Fitch last year. Moody's has indicated that the current situation negatively impacts the rating and may revise its outlook from stable to negative, potentially leading to another downgrade. This negative trend may add pressure to OAT yields and exacerbate investor concerns. Comparative upgrades of Ireland and Spain suggest France may be diverging negatively from other semi-core/peripheral countries. This downgrade could also contribute to a steepening of the yield curve, with long-term yields rise due to increased risk premiums

In the long-term perspective, while the widening of the spread between France and core and semi-core countries has been contained for now, this stability may be at risk depending on future political alliances. Should there be a coalition between President Macron and Jordan Bardella, the leader of the RN, it would introduce new variables into the political landscape. The main outcome could be an "ungovernable" government until the next presidential elections in 2027.