Eurozone Sovereign Bond Yields Stabilize After Weak PMIs in France and Germany

France and Germany See Economic Slowdown

The PMI surveys, carried out by S&P Global/HCOB, revealed weak demand IS impacting France's economic activity for the second month in a row. The PMI Flash index stood at 48.2 in June, indicating a further contraction from 48.9 (revised downward) in May. The slowdown has come as the country gears up for early legislative elections scheduled for June 30 and July 7.

Meanwhile, Germany experienced a deceleration in growth due to issues within its manufacturing sector. The composite PMI fell to 50.6 in June from 52.4 in May, below the expected 52.7. The service sector's index declined slightly, from 54.2 to 53.5, indicating continued growth, but at a slower pace. In contrast, the manufacturing sector saw a sharper decline, with its index dropping to 43.4 from 45.4, well below the anticipated 46.4.

Eurozone Bond Yields React to PMI Reports

Government bond yields in the Eurozone could have declined after the latest PMI surveys as these reports could potentially influence the European Central Bank to consider further reductions in key interest rates. Due to political uncertainties, they have simply stabilized. The 10-year German Bund yield closed at 2.41%. Similarly, the French OAT with the same maturity ended the week at around 3.15%.

Successful Auction of French Government Bonds

Despite the upcoming legislative elections and weak economic indicators, the French OAT auction held on June 20, 2024, was successful with the issuance of €10.495 billion of medium-term OATs. Investors still appear to have confidence in French sovereign bonds, partly due to a belief that extensive public spending programs are unlikely to proceed given the public sector deficit and high tax levels in France, the highest among OECD countries.

Narrowing Risk Premium

The current market composure prevents the France-Germany spread from widening for now. As a result, the risk premium demanded by investors - the difference between the yield of the 10-year French OAT and the yield of the 10-year German Bund - stands at 74 basis points. It had risen to over 82 basis points last week, reaching its highest level since February 2017.

The worst is never certain, but this kind of speculation obviously remains to be confirmed in light of the results of the upcoming elections.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.