French 10-year bond yield tops 5% for first time since 2002
Key Facts
The yield on French 10-year borrowing topped 5% on October 21 for the first time since 2002, escalating funding pressures on a government struggling to pass a 2027 budget and cut the deficit. Le Monde said Moody’s decision to affirm France’s Aa3 rating on October 23 did little to ease concerns about public finances and political uncertainty. Although the agency kept the rating, it attached a negative outlook, while many economists had expected a downgrade to A1. The yield’s move above that level reflects rising sovereign borrowing costs as economic activity indicators weaken. Social unrest is adding to existing budgetary and political pressures, but it is not the only factor behind higher yields.
French government bond yields rose 3 basis points to 4.96% on October 20, after touching 4.9937% earlier in the month, their highest level since July 2002, Reuters reported. On the same day, the spread between French and German bond yields widened 5.5 basis points to 152.50 basis points. The spread measures the yield premium investors demand on French debt compared with German debt. It widened as investors remained cautious ahead of planned protests, amid concerns over France’s large deficit. The moves put higher borrowing costs at the heart of the government’s challenge in financing the deficit and passing next year’s budget.
Le Monde estimates that France’s deficit is on track to reach 5.4% in 2026, while public debt could rise to 119.3% of gross domestic product by year-end and then to 121.7% in 2027. Annual growth forecasts have also been cut to 0.4%. At the end of June, public debt stood at about 3.6 trillion euros, equivalent to 119% of GDP, the Associated Press reported, while the government expected it to approach 122%, a record level. The figures underscore the importance of passing a budget that reduces the deficit, a step Moody’s assumed would be achieved when it affirmed the rating. The agency also tied its assessment to the possibility that funding costs and social tensions would ease somewhat over the following months.
Activity data reinforce the picture of pressure on growth: France’s preliminary services purchasing managers’ index fell to 48.4 in October from 51.2 in September, below the Reuters poll forecast of 50.7. A reading below 50 indicates contracting activity, after the index had been above that level the previous month. The composite index, which combines the services and manufacturing surveys, also fell to 48.4 from 51.1, compared with a forecast of 50.5. Joe Hayes, an economist at S&P Global, said the business expectations index for the next 12 months fell to its lowest level in six and a half years. He attributed the decline to companies’ concerns about a highly uncertain presidential election in 2027, alongside ongoing worries about France’s fiscal position.
On the streets, France’s Interior Ministry announced the deployment of up to 70,000 security personnel across the country ahead of protests on October 24, according to the Associated Press. The move followed more than half a million people taking to the streets the previous week, and about 3,000 stores being damaged or looted during the preceding weekend. S&P Global said business confidence was at its lowest level since 2012, excluding the pandemic period, as the economy slipped into contraction amid strikes, protests and political instability. On debt, Moody’s kept the rating at Aa3 with a negative outlook, while investors await S&P’s review scheduled for November 27, according to the follow-up angle cited in the source material. The European Central Bank also holds its monetary policy meeting on October 28 and 29, with its press conference scheduled for the second day.