French government bonds renamed ‘Frogs’ due to rise in yield

The recent increase in yields on French sovereign bonds have led to some re-naming the benchmark 10 year OAT (Obligations Assimilables du Trésor) bonds, FROGS for France’s Oversized Government and Social Security, French financial newspaper, Les Echos reports.

Although most other major economies have also seen bond yields rise, the financial markets are obsessing on France, according to the paper.

At the last bond issue on October 1 by Agence France Trésor, the government agency in charge of bond issues, the yield on 10 year OAT bonds almost reached 5%, before falling back to 4.8%.

Another study seen by Les Echos is by Germany’s Deutsche Bank, which claimed that the rise in French bond prices was the quickest seen since the revolutionary Terror of 1793-94, when leading politicians, lawyers and financiers, were dragged to the guillotine to have their heads sliced off.

Bonds operate as I Owe You notes, and are a way for governments and companies to raise money.

When they are issued the coupon (interest) payable on the bonds is higher the greater the chance investors think that the issuer, a government or company, could default and not pay all sums due. Equally a bond may be issued at sub par price to provide a higher yield.

Other factors which affect prices include high inflation which can reduce the value of the bond payments.

Markets exist where different bonds are bought and sold, with the price depending on, for example, how much time is left before they are repayable and current interest rates as well as their creditworthiness.

The rise in French bond yields seems to have heightened when the leader of the far left party La France Insoumise Jean-Luc Mélenchon suggested that if he became President, he would freeze French bonds owned by the European Central Bank. This would effectively cancel some €600bn of debt. 

This would be a violation of (Article 123) of the Treaty on the Functioning of the European Union (TFEU) according to Christine Lagarde, the head of the ECB.

Mélenchon is currently second in most opinion polls when people are asked who they want to be the next president, behind the far-right leader Marine Le Pen.

Bond markets are also worried about the French deficit, the amount added to the nation’s debt each year.

At the moment it is running at some 5.4% of Gross Domestic Product, with the government’s budget proposals aiming to lower it to 5%.

But the proposals have to go before parliament, and it is unlikely that they will pass, with parliament being split into five blocks and presidential candidates taking increasingly populist stances.

While most French politicians seem happy to ignore what is happening on the bond markets, banks are increasingly worried.

French banks have seen the price of insuring their debt rise sharply, putting them at a disadvantage to other European and American banks.

And they say the politicians should be worried – it was a sharp rise in bonds which saw Liz Truss’s short reign as prime minister of the United Kingdom end.