Fluctuation in bond rates: the Franco-German phenomenon

Bond markets are often considered the barometer of the global economy. In this article, we will analyze the fluctuations of bond rates in France and Germany, two major countries in the euro zone.

The French bond market

The bond market is an essential component of the French financial system. It is used to finance a significant part of public spending as well as private investments. Interest rates on French government bonds tend to change based on several factors, such as economic expectations, monetary policy and geopolitical events.

The effects of monetary policy

One of the main factors influencing borrowing rates in France is the monetary policy of the European Central Bank (ECB). The ECB sets key rates to influence credit conditions in the euro zone. An increase in the ECB’s key rates generally leads to an increase in interest rates on French bonds, while a reduction in key rates causes a drop in borrowing rates.

Economic expectations and sovereign risk

The economic outlook also plays a crucial role in the fluctuation of bond yields. If investors expect robust economic growth, there is typically increased demand for government bonds and lower interest rates. Conversely, if the economic outlook is pessimistic, investors may shy away from French bonds, leading to higher borrowing rates. THE sovereign risk, or the capacity of a State to meet its financial commitments, also influences bond rates.

The German bond market

Germany is the most economically sound country in the Eurozone, as evidenced by its low unemployment rate and trade surplus. Thus, the German government bonds are considered a safe investment by investors, due to Germany’s low default risk. However, German borrowing rates also fluctuate depending on several factors.

Adjustment to monetary policy

Just as in France, German bond rates are influenced by monetary policy decisions taken by the ECB. Therefore, a change in policy rates can cause a similar reaction in German borrowing rates.

Influence of economic expectations

The economic outlook in Germany and the Eurozone has a significant impact on German bond rates. During periods of economic growth, demand for German bonds is generally high and borrowing rates remain low. On the other hand, a deterioration in the economic outlook may lead to an increase in interest rates.

Comparison between French and German bond rates

Although borrowing rates in France and Germany may be affected by similar factors, there are notable differences in how they change.

Rate spreads

The difference between French and German interest rates, called gap, is a key indicator used to compare the two bond markets. A significant gap between the rates of the two countries indicates a divergence in the perceptions of sovereign risk associated with each of them. For example, an increase in the spread means that investors consider French sovereign risk to be higher than that of Germany, and vice versa.

The role of political actors

Political decisions can also have an impact on the movement of bond rates. Tax reforms, fiscal stimulus packages and austerity programs are examples of measures that can influence economic expectations and, therefore, borrowing rates.

Recent developments in Franco-German bond rates

French and German borrowing rates have experienced an upward trend since the start of the year, with a significant acceleration beyond the symbolic threshold for both countries. Several reasons explain this development.

ECB announcements

The discovery of the Omicron variant of the coronavirus has reinforced expectations of less aggressive monetary tightening by the ECB, which could support bond rates in the euro zone.

The global economic context

The global economic recovery, driven by the increasing distribution of COVID-19 vaccines, has also contributed to an increase in borrowing rates in France and Germany. Economic growth and inflation have been higher than expected, raising expectations of less accommodative monetary policy from central banks.

Geopolitical tensions

Finally, geopolitical tensions, particularly between the United States and China, have created uncertainties in international financial markets. These concerns have led to increased volatility and fluctuating interest rates on French and German bonds.

Things to watch out for

Several factors could influence the future evolution of borrowing rates in France and Germany. Monetary policy decisions, economic outlook, geopolitical developments and developments linked to the COVID-19 pandemic are all elements likely to affect bond rates in both countries.