Key facts
- French 10-year bond yields reached their highest level since 2002 last Friday.
- The yield spread between French and German 10-year bonds widened to its largest in nearly 15 years.
- France's debt is expected to rise to 119% of GDP this year.
- Eurozone inflation accelerated to 3.8% in September.
- The euro fell 2% against the dollar over the last month.
- France's benchmark CAC 40 index is down 3% over the last five trading days.
France's government bond market is experiencing a significant sell-off, with yields on its 10-year debt surging to nearly 5%, the highest level since 2002. This marks a dramatic increase from effectively zero rates five years ago and has widened the spread between French and German bond yields to a near 15-year high.
Investors are increasingly concerned about France's fiscal situation, particularly after the unveiling of its 2027 budget bill, which projects the country's debt to rise to an all-time high of 119% of GDP this year. Fears that the nation's borrowing plans are becoming unsustainable have been amplified by the prospect of a record amount of bond sales next year.
Broader European economic and political factors are exacerbating the sell-off. Eurozone inflation accelerated to 3.8% in September, making investors more hesitant to hold government debt. Political instability, including snap elections called in Spain and ongoing geopolitical tensions, also contributes to market anxiety.
The turmoil in French bonds is already impacting other eurozone nations. Italy's 10-year bond yield rose to 4.74%, and Greece's 10-year yield climbed to 4.57%, both increasing by 18 basis points over the past week.
Economists and strategists are warning of potential financial contagion. Lukman Otunuga of FXTM noted that the widening spread between French and German borrowing costs sends a clear message and that caution could spill over into the US market. Mohamed El-Erian highlighted the growing spillover of interest rate risk into credit and spread risk in Europe.
The global bond sell-off is also affecting currency and stock markets. The euro has fallen 2% against the dollar in the last month, reaching a 17-year low. European stocks, including France's CAC 40 index, have seen declines, with the index down 3% over the past five trading days.