The French government bond market showed signs of stability on Monday, with the premium investors demand for holding French bonds decreasing from a 12-year high. Analysts attributed this to expectations of a hung parliament, which could limit increases in fiscal spending and support France's debt sustainability.

Marine Le Pen's far-right National Rally (RN) party made significant gains in the first round of France's parliamentary elections, setting the stage for a crucial run-off vote next week after days of coalition-building efforts.

Financial markets reacted with cautious optimism following efforts to block RN's path to power. However, experts remain cautious. "The National Rally (RN) surpassed expectations and could still secure enough votes in the second round for a relative or even outright majority," commented Alex Everett, investment manager at abrdn.

The narrowing gap between French and German 10-year sovereign bond yields, now at 75 basis points from a recent high of 85.2, reflects reduced concerns about France destabilizing the Eurozone. Meanwhile, German safe-haven Bunds saw reduced performance relative to other Eurozone bonds.

France's 10-year government bond yield reached an eight-month high at 3.344%, reflecting market uncertainty over the parliament's divided composition. "Given the fragmented parliament, it's unlikely the new government can garner support for significant spending increases," noted Rune Thyge Johansen, euro area economist at Danske Bank.

Yield spreads across Eurozone countries tightened, with Italy and Greece seeing decreases of 7 basis points each, while Portugal fell by 4 bps and Spain by 1 bp. Analysts from Citi foresee continued political instability in France post-election, which could impact policy coherence and the country's influence in Europe.

The outcome of next Sunday's run-off will determine whether the eurosceptic RN can form a coalition with pro-EU forces. Analysts project that if RN implements part of its fiscal agenda, French bond yield spreads could tighten further, but widen significantly if more expansive fiscal policies are enacted.

Regardless of the election outcome, France's fiscal challenges are expected to persist. S&P Global recently downgraded France, citing potential impacts from policies advocated by the RN. The European Commission has also warned France and other countries about breaching EU budget deficit limits.

German bond yields rose slightly following inflation data, affecting expectations around the European Central Bank's future monetary policies. Markets adjusted their forecasts, anticipating moderate ECB easing this year.

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