Hedge funds are going against market consensus and betting that ultra-low French government bond yields are unsustainable, believing a sluggish economy and the new government’s policies will eventually force up borrowing costs.
Investors have generally given France the benefit of the doubt this year, treating it as a core euro zone economy despite its debt. Its bond yields have, as a result, generally tracked Germany’s rather than struggling Italy’s or Spain’s.
But many macro funds now think the yields, which have collapsed this year, cannot remain around the lowest levels seen for more than 20 years. France’s economy, after all, is teetering on the brink of recession.
These include raising taxes on the rich and cutting the pension age to 60 for some workers, risking a reduction in tax revenues, increasing pressure on France’s welfare system and hitting its credit rating.