France's government bond yield has reached levels last seen during the eurozone crisis. What are the implications?

A key indicator of investor confidence in French government bonds—the premium demanded for 10-year bonds relative to benchmark German bonds—reached a 15-year high on October 22, that is, since the eurozone debt crisis. Market sentiment continues to be affected by concerns over the state of the country’s public finances and ongoing street protests, Reuters reports.

The spread between the yields on 10-year French and German government bonds widened to 177.7 basis points. The last time it reached this level was in November 2011—at the height of the eurozone debt crisis, when markets feared the breakup of the European Union, according to Bloomberg.

The yield on benchmark 10-year French bonds rose during trading on October 22 to 5.14%, its highest level since July 2002, according to the agency. The yield on two-year bonds rose by 11 basis points—such a sharp one-day move is atypical for a developed-market economy, the agency notes.

The CAC 40 stock index fell 1.4% on October 22.

Political uncertainty ahead of next year’s presidential election in France and difficulties in passing the budget are putting pressure on the market. Authorities have promised to step up security measures for the new protests scheduled for this coming Saturday: in addition to extra police forces, troops will be deployed, Reuters reported. At the same time, rising energy prices are fueling expectations of an ECB rate hike, increasing pressure on highly indebted countries such as France.

Spreads against German Bunds widened across the eurozone: in Belgium, the spread rose by more than 10 basis points, reaching its highest level since 2012; in Italy the spread increased by 10.5 points, in Spain by 7.5 points, and in Greece by 8.5 points.

"The key question is whether the European Central Bank will intervene if tensions escalate," Andrzej Szczepaniak, Nomura's senior economist for Europe, told Reuters. “We believe the threshold for ECB intervention is very high,” he cautioned. According to the economist, this would only happen if France’s problems spread to other markets and prevented the regulator from managing borrowing costs.

Irina Kurochkina, a portfolio manager at Aegon Investment Management, agrees that the ECB could stabilize the situation if it made it clear that the sharp rise in yields has led to an excessively rapid tightening of financial conditions. Such a signal would dampen expectations of further rate hikes and support the bond market. Traders are currently pricing in three rate hikes by the end of 2027, according to Reuters.

“The political deadlock and public discontent over the high cost of living are effectively depriving the French government of any opportunity to restore order to public finances ahead of next year’s presidential election,” says Elias Haddad, senior market strategist at Brown Brothers Harriman & Co.

In the coming months, there are few factors that could restore investor confidence in French government debt, according to Henrietta Pakment, Chief Operating Officer of the fixed-income division at Allspring Global Investments.

Europe now has more safeguards against a debt crisis than it did in the early 2010s, and France is not facing the banking problems that engulfed Greece and other countries at that time, said Craig Weisi, a portfolio manager at Guinness Global Investors. However, in his view, the sell-off could spread to German bonds if investors begin to fear that Germany will have to finance support for more indebted countries through new borrowing, Bloomberg reports.

Europe is better prepared for crises today than it was 15 years ago, and European institutions have grown stronger, according to Citi economist Jada Jani. “But the resurgence of Euroskepticism is a limiting factor,” she warned.

This article was AI-translated and verified by a human editor