The bond market has fully priced in France's deficit risk; Goldman Sachs predicts that the France-Germany bond yield spread will eventually converge.

　　 Goldman Sachs analysts pointed out in their latest report that the current bond market has fully priced in the risk of France's deteriorating fiscal deficit. Unless the probability of a re-election increases, the yield spread between French and German government bonds will eventually tend to narrow.

　　“Although we believe that the risk-reward ratio for narrowing German government bond swap spreads is currently unattractive, the potential for risk spillover to other sovereign spread markets or outside German government bonds remains limited,” the analysts added.

　　 Tradeweb data shows that as French Prime Minister François Bayrou announced a confidence vote to be held on September 8, the 10-year French-German bond yield spread once widened to a new cycle high above 80 basis points last week, before narrowing to below 80 basis points later in the week.