Eurozone bond rates fall to record low levels

The Euro logo is displayed in front of the European Central Bank, ECB in Frankfurt am Main, western Germany, on August 7, 2014
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The Euro logo is displayed in front of the European Central Bank, ECB in Frankfurt am Main, western Germany, on August 7, 2014 (AFP Photo/Daniel Roland)

Paris (AFP) - The cost of borrowing for eurozone countries fell to record low levels on Wednesday, despite gloom over the economic outlook and crisis over policy in France.

Bond interest rates are falling on prospects that the European Central Bank may ramp up cash in the economy.

And although it appeared to have little immediate effect on market indicators, analysts welcomed the arrival of former banker Emmanuel Macron as France's new finance minister in a reshuffled government.

The interest rate indicated by French bonds, closely watched by the government since it determines the budget burden of financing France's debt mountain, fell to a record low level despite the political upheaval, as did yields on several other eurozone bonds.

The rate for French 10-year debt dropped to a record low of 1.249 percent from 1.275 percent.

The interest rate or yield indicated by traded German 10-year bonds, the benchmark for the eurozone, fell to a record low level of 0.915 percent from 0.939 percent late on Tuesday.

Records were also broken for Italian and Spanish 10-year debt. The Italian yield fell to 2.372 percent from 2.413 percent, and the Spanish rate to 2.097 percent from 2.172 percent.

A belief that the European Central Bank is moving towards injecting money massively into the eurozone economy to ward off deflation has pushed funds into bonds before market interest rates fall further.

This has the automatic effect of pushing down the percentage interest carried by the bonds.

But market attention was also focused on the surprise appointment late on Tuesday of Macron as economy minister under Finance Minister Michel Sapin.

He replaced renegade Arnaud Montebourg who precipitated the dismissal of the previous government on Monday with a weekend speech attacking austerity policies by France, Germany and the European Union.

Analysts, who have warned that France now looks like the weak link in the eurozone, see Macron's appointment as a show of commitment by President Francois Hollande to enact reforms helping business and cutting public spending.

The EU reacted to the creation of the new government in Paris by warning France that it has "no time to lose" in pushing ahead with deadlocked reforms.

- Macron appointment a strong signal -

At Berenberg bank in London, economist Christian Schultz said that France was getting more serious about reforms, and that Macron could turn out to be a "much-needed pro-market influence in the Socialist cabinet."

Strategists at French brokers Credit Mutuel-CIC said that Hollande "is sending a very clear message to economic decision-makers, to the European Commission, and to investors, about his commitment to push reforms and supply-side policies", meaning making the economy more efficient.

But they doubted that the new team could generate a "confidence shock", and warned that France remained on "a razor's edge".

For the time being, markets would continue to give France the benefit of the doubt on its ability to enact reforms, they said.

At Barclays bank, analysts also said that the appointment of Macron was a "strong signal" and that "Hollande has a team which will not criticise European policies and Chancellor Merkel". This would strengthen his hand at EU level.

The main factor pushing down eurozone bond yields was a remark by ECB head Mario Draghi on Friday assuring that the bank would ward off any threat of deflation.

Bond strategist Cyril Regnat at Natixis bank in Paris said that "with his words, Mario Draghi has a grip on the markets and will continue to keep this hold until the European macroeconomy turns up."