French bonds near parity with Greece as budget saga continues
French yields ease, finance minister says may compromise
Greek yields remain near parity with France
German inflation ticks up, cut priced in next month
Updates prices
By Amanda Cooper
LONDON, Nov 28 (Reuters) -French government bonds edged lower on Thursday as the market regained some poise after the previous day's sell-off that drove their risk premium over German bonds to its highest since the euro zone's 2012 debt crisis.
The U.S. Thanksgiving holiday made for subdued trading in the broader markets, leaving yields virtually unchanged across the board.
In France, Prime Minister Michel Barnier is facing public anger over his proposed budget and opposition from Marine Le Pen's far-right National Rally (RN), which props up his administration, might bring down the government.
Finance Minister Antoine Armand said on Thursday the government is ready to make concessions over the budget, which contains some 60 billion euros in savings aimed at reining in France's precarious finances.
The proposal has drawn widespread opposition and could even bring down Barnier's government by Christmas, according to a dozen sources from across the political spectrum.
Investors have long worried about France's finances and heavy debt burden and this latest round of political uncertainty has prompted them to punish French bonds.
French 10-year OAT yields FR10YT=RR were down 6.5 basis points on the day at 2.95%, leaving their premium over German Bunds DE10FR10=RR at 82 bps, some way below Wednesday's peak of 90 bps, the highest since the 2012 sovereign debt crisis.
"If (Barnier's government) don't manage to get anything across the line and Barnier loses a vote of no confidence before Christmas, then clearly, that's very bad news for the market and that would see spread of OATs over Bunds at the 10-year mark blow out well above 100 basis points," Daiwa Capital economist Chris Scicluna said.
"But again, there's a question about what should the baseline be and our baseline would be that there will be concessions made to keep the government alive and to deliver some kind of budget," he said.
FRANCE AND GREECE
In stark contrast to just a few years ago, this latest chapter has left French bonds trading almost at parity with Greek 10-year debt, as yields on the latter have fallen to the point where they are at a premium of just 1.5 bps over France FR10YT=RR, <GR10YT=RR>. French yields have never traded above those of Greece.
Greece was at the heart of the 2012 crisis and on the receiving end of multi-billion dollar bailouts and years of painful austerity to balance its finances.
While their sovereign debt may trade at roughly the same rates, France and Greece are not comparable, according to France's Armand.
"France is not Greece," he told BFM TV.
Meanwhile, German Bund yields dropped to a fresh 8-week low at 2.126%, down 4 bps on the day DE10YT=RR.
Two-year German Schatz yields DE2YT=RR were around 3.5 bps lower at 1.991%, marginally above this week's two-year low of 1.971%.
Economic data on Thursday showed inflation picked up a bit more than expected in a number of German states this month, suggesting the national rate would also increase as forecast.
Traders are more likely to focus on Friday's reports on inflation for the euro zone as a whole to inform their thinking about what the European Central Bank might do at its meeting next month.
Right now, markets show traders expect the ECB to cut rates by 25 bps, with a slim chance of a 50-bp cut also priced in.
Separately, ECB President Christine Lagarde told the Financial Times in an interview published on Thursday a global trade war would be "in nobody's interest".
European markets in particular have been rattled by U.S. President-elect Donald Trump's pledges to slap tariffs on those trading partners he considers to have an unfair advantage over the United States, starting with China, Mexico and Canada. Investors fear the European Union could be next.
Reporting by Amanda Cooper
Editing by Kirsten Donovan and Gareth Jones
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