French bond markets calm despite country hitting political gridlock

Government bond markets in France saw some selling early on Monday, but were fairly muted overall despite political gridlock after a second round of legislative elections.

The yield, which moves inversely to the price, on the 10-year French government bond rose 3 basis points in early trade, but retreated shortly after and was relatively flat at 3.221% around 9:30 a.m. London time.

Jitters have spread through France's bond market in recent weeks. The 10-year yield topped 3.3% — a roughly 8-month high — after French President Emmanuel Macron called the snap parliamentary election in the middle of June.

Meanwhile, the gap (or spread) between French bond yields and German bond yields had topped 85 basis points in recent weeks, hitting its highest level since 2012.

After falling as the election approached, the gap on Monday widened to more than 70 basis points before slipping back to around 67 basis points.

The relative calm comes despite France facing a challenging fiscal position. The European Commission announced two weeks ago that it intended to place France under an Excessive Deficit Procedure due to its failure to keep its budget deficit within 3 percent of gross domestic product. An EDP is an action launched by the European Commission against any EU member state that exceeds the budgetary deficit ceiling or fails to reduce its debts.

This meant the tax and spending plans of both the left-wing New Popular Front and the hard-right Rassemblement National (RN, or National Rally) party had been a key cause of concern going into the snap election.

Results from the vote on Sunday showed the New Popular Front coalition unexpectedly won the most seats in the country's parliament but failed to clinch an absolute majority. French