The interest rate on the French State 10-years bond has reached 0.68% at the market closure last Friday. It was a light diminution compared to the previous days when it had overpassed 0.70% but a strong increase since the beginning of the year. In 2021, the 10- years rate had been all along the year near zero. The fall had started in 2019 when it had been clearly negative (-0.40% in August for instance). It stabilized in 2020 and had finished the year at -0.34%. The short term rates, them, remained under zero for three years due to the decisions of the European Central Bank.

The current rebound of the French long term bonds reveals an evolution of the investors behavior which are more demanding when the ECB is still a major buyer of the bonds on the market through its two programs, the APP decided several years ago to support activity and to make inflation, which was almost nil, coming back to the inferior but near 2% target included in its mandate, and the PEPP, decided to allow the States to financing the necessary supporting measures in favor of enterprises and household to cope with the economic crisis  resulting from the corona virus pandemic. But the Francfort institution has not yet given precise indications about its policy for the coming months.

The causes of this rebound are well identified. The economic recovery in the world and in the euro zone where it has reached 5% in 2021, is stronger than expected and that does not anymore justify a monetary policy as accomodative as in the past. The central banks of the Western countries have recognized it and, with a variable size and an agenda which remains to be precised, have let to guess an evolution of their monetary policies. But this recovery has been accompanied with a very important rebound of inflation in developped countries, mainly caused by the increase of fossil energies prices resulting from the geopolitical tensions created by the Ukranian crisis.

The economies recovering and inflation being significantly above the targets inscribed in their mandates, the central banks have no more reasons to practice such an expansionnist policy, even if their action must remain cautious and progressive to avoid to provoke a financial crisis or to break the current recovery. The reduction of the level of intervention has, as an immediate effect, to give back to market rules their whole influence. That has, for the French economy, a paradoxical consequence : the inflation rate, 2.9% or 3.4% according to the adopted definition, is by large inferior to the average rate observed in the euro zone which is near 5%. But the high level of the public indebtedness and the hazards generated by any election have lead the investors to a certain mistrust.

So the spread with the German rate for the 10 years maturities increased from the 30 to 40 basis points observed during these last years to more than 50 basis points for a few days. But that also means that the real rate, if we take into consideration inflation, is now by large inferior in Germany to the one observed in France, i.e. near -5% against -2.7%. The difference would progressively reduce itself in the same time that tensions on oil and natural gas are softening because the tax system on gasoline in Germany is less heavy than in France and the price reductions will be more quickly transfered to consumers. But we are in the paradoxical situation under which a country which has a lower inflation rate than the others will be more affected by the evolution of the monetary policy than the less virtuous ones.

It remains that the consequences of this evolution must not be overestimated. The main impact of real negative rates is to reduce the present and future charge of the public debts. And the most indebted nations, as France and Italy, will take profit of it. Year after year, thanks to the reimbursement of the bonds coming at maturity and to their refinancing by bonds carrying much lower nominal rates, the debt charge, for States budgets, will be progressively reduced. So, on April 25th, the French State will reimburse a 41.5 billions euro bond carrying a 3% interest rate coming at maturity. So every year the Treasury paid 1.25 billion for the interests. It will replace it by a bond with the same amount but carrying the current rate, i.e. 0.70% if they are stable. So it will have saved every year in the future near one billion euros.

Atop of that, fiscal receipts will benefit from the prices increase, as V.A.T. or the taxes on real estate transactions. So the addition of negative real rates and low nominal ones allows not to worrying about the current trends, but to one condition that the State brings the proof that it is very cautious when it issues indexed bond, especially if the indexation clause is on the euro zone inflation. That practice was launched at a time when France was not the best pupil of the euro zone and when we thought that we could take advantage, for instance, from the German better discipline. But the recent experience has shown that this time is over, at least now, and that it existed a real risk of  inflationary spiral with our neighbors.

The stakes are far from being neglectible. On July 25th, the State will reimburse a 19.9 billions bond carrying a 1.1% rate, i.e. a near 200 million euros annual charge. But that bond was indexed on the euro zone inflation.  And it will have to pay a 3.6 billions euro indexation charge corresponding to the 18% prices increase during the duration of the bond. Being a non annual charge, the State will have the possibility to use its available liquidities, coming for instance from the cashed past issuances premiums, but it remains that it will have to pay that amount.

In January, Agence France Trésor has issued a bond carrying a 0.1% rate with a thirty one years maturity, indexed on the euro zone inflation. The amount received for suscription, which is not surprising, has been very high, 24 billions and it has been satisfied at 3 billions. So, in the current context, we can question ourselves about the interest to proceed to such debt issuances, all the more that the market rate for 30 years maturities is hardly superior to 1% and that it is difficult to imagine that the average inflation rate during the duration of the bond will remained limited to such a low rate in order that the indexation charges being less costly than the payment of the interests at the market rate.

The current rise of the interest rates does not present a significant risk for the public finances because that one is by large inferior to inflation and has all the chances to remain there. To the opposite, times have changed and the management of the debt must adapt itself to the new realities. Inflation in France is not anymore superior to what we see in the euro zone. So there is nothing to gain to issue bonds carrying an indexation based on the inflation of the zone. It is unuseful to be exposed to the risks of inflationnist spirals which could occur inside our neighbors and whose consequences could be very heavy for France public finances.