French bond risk gap hits 15-year high amid protests

French government borrowing costs led a rise in euro zone bond yields on Wednesday, Oct. 21. The benchmark 10-year OAT yield moved close to 5%, a level it has not reached since mid-2002, Reuters reported. Investors were weighing nationwide protests, local curfews and doubts over whether the minority government can pass its 2027 budget. On Friday, Moody's ↗ 2.08% is due to review France's credit rating.reuters.com

Spread hits widest in years

The gap between French and German 10-year yields, a closely watched measure of how much extra risk investors see in French debt, widened six basis points to 159.4 basis points. That is the widest in 15 years, according to Bloomberg. French 10-year yields have risen more than 16 basis points so far this week. Among the world's largest economies, no other government's bonds have risen as much, and the average increase is 5.4 basis points, Reuters said, citing LSEG data. Italian yields have risen only about half as much as French yields this week. A rebound in oil prices above $110 a barrel also weighed on the market.bloomberg.com+1

"The French concerns are still there, even if the domestic unrest seems to have calmed for now," said Jim Reid, a strategist at Deutsche Bank ↘ 2.39%, Reuters reported. Benjamin Schroeder of ING ↘ 2.93% said the protests show "any government will struggle to implement the required reforms and savings against broader public resistance," according to Reuters.reuters.com+1

Curfews and new marches

Over the weekend, marches against high inflation turned into the worst riots France has seen in years, and authorities then imposed partial curfews in parts of Paris and other cities, AFP reported via Kuwait Times. Prime Minister Sébastien Lecornu was set to meet union leaders on Wednesday. He has promised a "massive" police deployment for Saturday, when the Yellow Vest movement plans a Paris march starting from Bastille square. The unrest is already hurting companies. On Oct. 20, Carrefour cut its targets for growth in operating profit margin because of the riots, Reuters noted.kuwaittimes.com+1

Budget and ratings risk

Lecornu's 2027 budget seeks a fiscal adjustment of about 54 billion euros ($60.8 billion) as the government tries to bring down the deficit, CNBC reported. With parliament split and presidential elections due in April and May, Lecornu has little chance of passing a cost-cutting budget, which must be adopted by the end of the year, AFP reported. Investment manager Ninety One has warned that if the budget fails, the deficit could exceed 6% of GDP next year, Business Insider reported.cnbc.com+2

Moody's currently rates France Aa3 with a negative outlook, and its review is scheduled for Friday, Oct. 23, Business Insider España reported. Markets widely expect a downgrade, according to AFP.kuwaittimes.com+1