French Long-Term Bond Sale Smooth But Costly

The French government sold close to the maximum targeted amount of long-term government bonds at auction Thursday, but it had to pay slightly higher yields as a result of uncertainty ahead of presidential elections that conclude May 6, and as the impact of the European Central Bank's cash boost starts to wear off.

The strength of demand contrasted with a Spanish government bond auction Wednesday, in which the government sold close to the minimum targeted amount at higher yields. Its relative success should cool fears that France will soon find itself in the bond market's crosshairs.

The euro zone's second largest economy heads for the first round of polls later this month against a backdrop of weak growth, rising unemployment and a large budget deficit.

The French Treasury Agency on Thursday sold EUR8.439 billion of long-term government bonds, known as OATs, at the upper end of its EUR7 billion to EUR8.5 billion target range. It auctioned the 4.25% October 2017, 3% April 2022, 3.50% April 2026 and 4.50% April 2041 OATs. The three shortest-dated OATs were previously auctioned in March, while the 2041-dated OAT was last sold in January.

The average yield on the 2017 OAT was set at 1.96%, up from 1.91% previously. The average yield on the 2022 OAT was 2.98%, up from 2.91%, while the average yield on the 2026 OAT came in at 3.46%, up from 3.30% previously. The average yield on the 2041 OAT was 3.79%, down from 3.97% at its January sale.

The yields were in line with secondary market levels.

"Demand was again relatively strong on the 30-year area despite the incoming presidential elections which is a good signal for French bonds," said Cyril Regnat, strategist at Natixis.

Demand for European government bonds has received a boost in recent months as banks invested cheap funds provided by the European Central Bank in two Long Term Refinancing Operations.

But analysts at the Royal Bank of Scotland said that the weakness of recent Italian and Spanish auctions suggests much of the money provided by the ECB has been already deployed, "which will affect France too."

According to an opinion poll released Wednesday, President Nicolas Sarkozy would lead the Socialist Party's Francois Hollande in the first round of the election to be held April 22, though he would lose in the event of a run-off.

"We believe that the French government will have no choice but to stick to its commitment to reduce the public deficit, if anything because the pressure of the European Union, the markets and/or rating agencies will return in case of slippage," economists at Credit Agricole CIB said in a note.

France's 2011 budget deficit reached 5.2% of GDP, which the current government of plans to reduce to 4.5% of GDP this year. Euro-zone rules dictate that member countries bring down the deficit to 3% of GDP next year.

French public debt reached 85.8% of gross domestic product at the end of 2011, only marginally below the euro-zone average of 88%, but above Germany's 82%.