French debt risk premium drops as Macron says he will appoint new prime minister

By Stefano Rebaudo

Dec 6 (Reuters) – The risk premium investors demand to hold French debt rather than German Bunds dropped to a fresh two-week low on Friday, after President Emmanuel Macron said he would appoint a new prime minister soon to get a 2025 budget approved by parliament.

Meanwhile, euro area benchmark Bund yields were on track for their first weekly rise in over a month, after reaching 2% on Monday as markets await key U.S. data later in the session.

U.S, payrolls could affect expectations for the outlook for Federal Reserve monetary policy.

Germany’s 10-year yield DE10YT=RR rose 0.5 basis points (bps) to 2.11%, set to end the week 2.5 bps higher.

The yield gap between French and safe-haven German bonds DE10FR10=RR — a gauge of the premium investors demand to hold France’s debt – dropped to 75.7 bps, a fresh two-week low.

Markets are pricing a European Central Bank deposit rate at around 1.85% by next July EURESTECBM6X7=ICAP versus the current 3.25%. They are fully discounting a 25 bps rate cut next week and almost no chance of a 50 bps move. EURESTECBM1X2=ICAP.

Italy’s 10-year government bond yields IT10YT=RR – the benchmark for the euro area periphery – fell 0.5 bps to 3.19%. The BTP yield spread DE10IT10=RR tightened to 118.5 bps.

Yield spreads versus German Bunds have tightened as markets expect significant rate cuts from the ECB in 2025, which would ease the burden of debt for overleveraged economies.

(Reporting by Stefano Rebaudo, editing by Amanda Cooper)

((stefano.rebaudo@tr.com))