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The French covered bond market is starting to look vulnerable to a sell-off following the recent underperformance of the government bond market. Local issuers had been anticipating a spread tightening on the back of the second covered bond purchasing programme, but they may now be wondering if they should have issued earlier.
In a little over two weeks, 10 year French Obligations Assimilables du Tresor bond yields have risen 60bp and the spread to Germany has widened to beyond 100bp. This follows Moody's warning that France's efforts to support its own banking system and other European nations are "exerting pressure on the stable outlook".
With a debt to GDP ratio of 86.2%, France has the highest debt of any triple-A eurozone member.
And, in the event the European Financial Stability Facility's recently ratified [Euro]440bn war chest is successfully leveraged, concern around France's top rating is likely to be further exacerbated. As a major guarantor of the facility, the country's underwriting could quickly turn to a hard cash commitment.
Though French covered bond...