France Turns from Sovereign Risk to Safe Haven within Months

At the beginning of this week, France caught investors by surprise when it sold treasuries at a negative yield. This historic event caused a change in sentiment towards the country and further magnified the looming uncertainty in Europe.

Back in January, France was wedged in a heated battle in its attempts to avoid the Eurozone contagion. Europe’s financial outlook was dim and France alongside other countries was looked as the next target after the PIIGs. Back then, Europe was bubbling with uncertainty, the debt crisis had ballooned beyond previous forecasts. French yields rose as investors sold off French bonds.

This all changed yesterdays. France is now in an exclusive club alongside Germany and The Netherlands.

France issued €7.2 billion worth of treasury bills through its Paris based debt office.  The short term debt is due in October and December 2012. There is also a maturity date that extends on to June 2013. All together, the bills pooled bids in the excess of €20 billion.

The weighted average yield of half year bills came in at negative 0.006 percent. Similarly, the three-month bills have a negative 0.005 yield, while the longer one-year bills  a positive yield 0.0013 percent.

“All the major, highly rated economies have extremely short-term rates right now,” said Richard Batty, a global investment strategist at Standard Life Investments.

French President François Hollande has pledged to lower the national deficit tto 3% of the GDP within the coming years.

“All the major, highly rated economies have extremely short-term rates right now,” said Richard Batty of Standard Life Investments.

This in retrospect makes no sense. In January the Euro-crisis was more contained. Now the problems have spread to Spain, and Greece might leave the Euro.

France promised to lower the retirement age from 62 to 60. It is hard to see how this move would boost economic growth. France also plans a large tax on the wealthiest citizens. While Hollande was elected on an anti-austerity program, nearly all economists would agree that raising taxes and reducing spending is austerity and will lower growth, at least in the near term.

It is puzzling why the market views French debt as safe. The best possible explanation is that Euros being withdrawn from countries like Spain and Italy are being piled into French Government securities.  However, if this is the case, it should have happened in January as well.

Then again the market is not always rational.