French assets rebound as Moody’s holds rating

French bonds and stocks advanced after Moody’s affirmed France’s sovereign credit rating at Aa3 with a negative outlook, avoiding a downgrade that many economists had expected. The move paused a selloff that had shaken French assets in recent weeks and provided some relief to investors focused on the country’s public finances and political backdrop.

France’s 10-year government bond yield, known as the OAT, fell to 4.973%, dropping back below the 5% level and retreating from highs last seen in 2002. The two-year yield also declined to 3.757%, stepping back from its highest levels since 2008 and easing some pressure at the front end of the curve.

The decline in French yields tightened the closely watched spread between France’s 10-year OAT and the German 10-year Bund. The gap narrowed by seven basis points to 161 basis points, after having stretched toward euro‑crisis style peaks above 155 basis points late in the previous week, reflecting a modest improvement in perceived relative risk.

German 10-year yields rose three basis points to 3.38%, amplifying the compression in the spread as French yields moved lower. The pullback in French borrowing costs was described as modest but significant enough to provide temporary breathing room after the recent surge in yields tied to concerns over France’s widening budget deficit and domestic unrest.

French equities responded positively to the ratings outcome. Stocks in Paris rose, outpacing broader European benchmarks. Futures on the CAC (FRA40) 40 index were up 0.7% around 8:25 a.m. in Paris, pointing to a higher open after the index had fallen 0.36% on Friday and 2.19% over the previous week.

Recent declines had left the CAC (FRA40) 40 down 3.65% over one month and 7.04% over three months, weighed down by sharp drops in banking and luxury shares and individual earnings-related moves. The rebound signaled tentative stabilization as investors reassessed French risk after Moody’s decision and ahead of a busy week for corporate earnings and macro events.

Moody’s Aa3 rating is seven notches above junk and on par with Britain.

While the affirmation supported markets in the near term, the outlook on the rating remains negative, reflecting ongoing concerns about France’s fiscal trajectory and political and security challenges. Some market participants suggested that, given this backdrop, the 10-year OAT yield could remain in a relatively high range in coming months, which would continue to weigh on the country’s debt burden. In currency markets, the euro was steady at $1.1205 even as most other major currencies in the Group of Ten weakened.