The 10-year French yield fell 5 basis points on Monday morning, after touching 5% last week for the first time since 2002. Moody's kept France at Aa3 with a negative outlook, on the assumption that a deficit-cutting 2027 budget is adopted.
France's bond market spent last week bracing for a downgrade. On Monday, it got its first trading session without one.
The yield on the 10-year French government bond was down 5 basis points at 8:40 a.m. in Paris. Last week it touched 5% for the first time since 2002. French stocks also rose: the CAC 40 was up 0.8% at 7,845.45 in early trading, and Germany's DAX gained 0.93%.
The relief follows Moody's decision on Friday to affirm France's Aa3 rating and keep a negative outlook. Bond markets had been pricing in a downgrade.
The condition attached
The affirmation is not unconditional. Moody's said its rating assumes that a deficit-reducing budget for 2027 will be adopted. France's finance ministry welcomed the decision and pointed to the credibility of its budget plans.
That puts the weight of the rating on a piece of legislation that still has to pass, in a country dealing with social unrest. A budget that is diluted, delayed or defeated would remove the assumption on which Friday's decision rests.
Why the yield matters
A 10-year yield at 5% is a high cost of borrowing for a country with France's rating, and the 5 basis point decline is small relative to the move that took it there. The size of Monday's rally, set against the size of last week's selloff, is the clearest measure of how much of a downgrade investors had priced.
The bigger question is the spread over German bonds, which measures how much more investors demand to hold French debt than euro-area benchmark debt. That gap is where any lasting change in confidence would show up.
Two readings
The first is that the reprieve buys time, and that 5% may mark the high for now. Moody's chose not to act, the government says its budget is credible, and investors responded by buying both bonds and stocks.
The second is that the decision changes the timetable rather than the risk. The rating is tied to a budget not yet adopted, the outlook is still negative, and S&P's review is scheduled for Nov. 27.
What to watch
Monday's closing yield and the spread to German bonds, the European Central Bank's decision on Thursday, French inflation and third-quarter growth figures on Friday, with economists expecting inflation of about 3.6%, the budget votes in parliament, and S&P's review on Nov. 27.