French-German bond yield spread reaches 157 basis points as yield touches 5%
Key Facts
The spread between French and German bond yields reached about 157 basis points in trading on Wednesday, October 21, approaching levels last seen in 2011, according to Reuters. The yield on 10-year French government bonds reached 5%, its highest since 2002, amid pressure linked to difficulties passing the budget, the deficit and political turmoil. An update from the agency showed French yields rising 8 basis points during the session, reflecting mounting pressure on government debt. The increase since the start of the week exceeded 20 basis points, extending the rise in yields throughout the week's trading. Wednesday's spread was close to a peak of 158.67 basis points reached in early October. That peak was the highest since November 2011, according to an earlier Reuters report, putting the latest move near historically elevated levels for the gap between French and German debt.
Pressure on France extended to investors' choices among European sovereign debt markets, according to a Reuters report in early October. The agency said investors were selling French bonds while buying German debt as a haven. It described their behaviour by saying they "do not want to take risks" as they shifted from French bonds to their German counterparts. In currency markets, the report noted fears of contagion spreading to the rest of the euro zone. Concerns surrounding the selloff in French debt thus also encompassed the currency market, amid worries that pressure could spread beyond France.
In an assessment of the nature of France's risk premium, ABN AMRO found that the rise in cash bond spreads far exceeded the increase in sovereign credit default swap spreads. The bank explained in its analysis that these swaps are more closely linked to fiscal fundamentals and credit risk. It said their spreads "have risen far less than cash bond spreads", pointing to additional premiums in the bond market beyond credit risk. On the debt-servicing burden, the Associated Press reported in early October that interest costs on French debt were expected to exceed 90 billion euros in 2027. Those projections place the interest bill against the backdrop of fiscal pressures, alongside the difficulties passing the budget and the deficit surrounding trading in French debt.
On economic activity, a release from France's statistics institute showed that the manufacturing business climate index held steady at 101 points in September. That level kept the index one point above its long-term average of 100 points, according to the institute. Describing the September reading, the institute said the index "remains one point above its long-term average". This industrial backdrop comes alongside the fiscal challenges and political turmoil weighing on the debt market. Attention is turning to Moody's review scheduled for October 23 as the next catalyst for assessing France's creditworthiness amid rising yields and a widening spread over Germany.