French bonds hold steady as parliament heads for gridlock
Updates at 1100 GMT
By Harry Robertson and Amanda Cooper
LONDON, July 8 (Reuters) -French government bond yields were little changed on Monday as investors waited for more information about the shape of the next French parliament, after a surprisingly strong showing by the left in Sunday's election.
French yields briefly traded at their lowest premium to German debt in almost a month before reversing course. The so-called spread hit its highest since the euro zone crisis in 2012 in late June as investors worried about a possible far-right victory.
The yield on France's benchmark 10-year bond FR10YT=RR was very slightly lower on the day at 3.209%, having gradually retreated from a high of 3.37% last week.
German 10-year debt DE10YT=RR, meanwhile, wasup 1 basis point (bp) at 2.541%, leaving the gap with French yields, which reflects the premium investors demand to hold French debt rather than Bunds, 1 bp narrower at 66.6 bps DE10FR10=RR.
That spread briefly hit a session low of 63.7 bps, the smallest since June 13.
The leftist New Popular Front emerged as the dominant force in the National Assembly after Sunday's election. Yet no single grouping secured a majority, triggering tricky negotiations that could result in an unwieldy coalition or a minority government.
President Emmanuel Macron's alliance came in second place, with the far right National Rally ending thirdafter leading in the polls for weeks.
"The left wing alliance is not seen as business friendly and should command less faith in prudent budget management," said Peter Schaffrik, global macro strategist at RBC Capital Markets.
"However, the lack of a clear majority in the Assembly should blunt any spending plans for the time being and act as a cushion for spread widening."
Elsewhere, Italian 10-year yields IT10YT=RR fell 1 bp to 3.929%. That left the Italian-German yield gap DE10IT10=RR 3 bps narrower at 138 bps.
Bond markets were waiting for key U.S. consumer price index inflation data on Thursday, which will influence the U.S. FederalReserve's upcoming interest rate decisions.
Investors will also be listening closely when Fed chair Jerome Powell testifies before Congress on Tuesday. Given the size and importance of the U.S. economy and dollar, Fed decisions reverberate through global financial markets.
The risk premium on French debt has surged on election fears The risk premium on French debt has surged on election fears https://reut.rs/4eLamyf
Reporting by Harry Robertson and Amanda Cooper; Editing by Bernadette Baum and Arun Koyyur
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