French bond selloff eases as country spared ratings downgrade

A selloff in French government bonds paused on Monday after the country's sovereign debt was spared a ratings downgrade by Moody's, while weekend protests largely passed without the civil unrest of the week before.Euro zone bonds were also supported by a small decline in oil prices, before interest rate decisions from the European Central Bank and Federal Reserve later in the week.France's 10-year OAT yield was down 4.5 basis points (bps) at 4.976%, after rising to 5.1415% on Thursday, its highest level since June 2002.The gap between German and French 10-year yields tightened by 5 bps to 161 bps, after hitting its widest level since 2011 last week.France Spared DowngradeMoody's late on Friday maintained its rating on the French sovereign at Aa3, providing some relief for Paris, which is facing difficulty shoring up its public finances due to a fragmented parliament and as posturing begins before next year's presidential election.The ratings agency said the Aa3 rating assumes a deficit-reducing budget in 2027, while financing costs and social tensions will abate somewhat in the next few months.

OATs should see additional rating relief after Moody's surprisingly stayed put for now, said Commerzbank rates strategist Rainer Guntermann in a note.Eyes On EcbThe ECB announces its latest policy decision on Thursday. The central bank is likely to keep its deposit rate unchanged, with focus on President Christine Lagarde's analysis of the outlook and how closely the central bank is monitoring the selloff in French debt and that of other indebted euro zone countries.

The temporary relief that began on Friday has chances to extend ahead of Thursday's ECB decision, said Commerzbank's Guntermann. Markets are growing wary that the ECB is paying more attention to headwinds from higher long-end yields. Germany's 10-year government bond yield, the benchmark for the euro zone, was up 1.5 bps at 3.357%.Germany's 2-year bond yield, which is sensitive to changes in ECB policy expectations, was up 2 bps at 3.049%.German bonds were one of the main beneficiaries of a flight to safety in the last week, as global investors also started to question the sustainability of the heavy capital expenditure related to the AI data centre buildout.