French 10-Year Bond Yields Hit 5% Amid Nationwide Protests and Fiscal Strain

POLICY WIRE — London, United Kingdom — Euro zone borrowing costs ticked upward on Wednesday, driven primarily by a sharp surge in French debt yields as financial markets processed the ongoing wave of demonstrations across France that are straining government finances.

Adding further pressure to market sentiment, oil prices rebounded above $110 a barrel following a brief decline during the previous session. Benchmark 10-year French OAT yields climbed more than 16 basis points over the course of the week, marking the most significant jump among major global economies, which averaged an increase of 5.4 basis points according to LSEG data.

French yields approached the 5% threshold for the first time since mid-2002, last trading up 3 basis points on the day at 4.948%. The yield on the French government’s benchmark 10-year bond also briefly crossed the 5% level as investors demanded higher returns for holding the nation’s debt, hitting a peak of 5.002% around 0914 GMT.

The yield spread between French debt and benchmark 10-year German Bunds edged back toward an early October 15-year high of nearly 160 basis points, resting at a euro zone high of 150 to 157 basis points. This widening gap illustrates the extra compensation investors require to lend money to France rather than Germany.

While street violence had reportedly quieted down by Tuesday, additional demonstrations remain scheduled for Saturday, creating tangible financial fallout for major corporations. Carrefour, Europe’s largest food retailer, adjusted its operating profit margin growth targets downward on Tuesday due to the impact of the ongoing riots.

Deutsche Bank strategist Jim Reid noted that French concerns remain active even though domestic unrest appears to have temporarily subsided. Meanwhile, market participants are also monitoring Italy, where similar anti-cost-of-living protests in Milan over the weekend prompted Prime Minister Giorgia Meloni to enact stricter anti-rioting legislation on Tuesday.

Italian sovereign debt avoided the severe sell-off impacting French markets, with 10-year Italian yields rising just 8 basis points this week—half the increase seen in French borrowing expenses. This left the yield premium of Italian BTPs over German Bunds slightly tighter at 113 basis points.

German 10-year yields, functioning as the key benchmark for the wider euro zone, increased by 3 basis points to reach 3.426%, tracking toward a weekly increase of roughly 1.5 basis points. Simultaneously, 2-year German debt yields advanced 3 basis points to settle at 3.083%.

Reporting by Policy-Wire (PW)