French bonds extend rally as Lecornu avoids more gridlock

French bonds rallied for a second day on Wednesday, pushing yields to their lowest in two months, after Prime Minister Sebastien Lecornu delayed implementation of a key pension reform, thereby avoiding more political gridlock in Europe's second-biggest economy.

French 10-year yields fell another 3 basis points in early trading to 3.37%, the lowest since August 15, bringing the decline so far this week to 10 bps, heading for the largest weekly decline since May.

Lecornu on Tuesday suspended implementation of President Emmanuel Macron's landmark pension reform until after the 2027 election, bowing to pressure from leftist lawmakers and sacrificing one of Macron's legacy achievements to ensure the survival of the government. Attention now turns to Lecornu's deficit-squeezing budget plans for 2026.


"The proposed 2026 draft budget would aim for a 4.7% deficit of GDP, which is broadly in-line with the previous outlook, and without the pension reform puts the trajectory of deficit/GDP closer to 5.0% over time," Jim Reid, a strategist at Deutsche Bank, said.

"So even though that might read negatively from a debt sustainability point of view, markets were reassured because it was seen as raising the chances that Lecornu would remain as PM and a snap legislative election would be avoided."

France's borrowing costs are among the highest in the euro zone as investors have grown increasingly wary of holding its sovereign debt given the fragility of the government's finances.

Meanwhile, German 10-year yields were down 1.4 bps on the day at 2.592%, having drawn strength this week from mounting trade tensions between the United States and China.