French bond selloff spreads to Italy, Belgium and Greece

France's borrowing costs have climbed to levels not seen since the eurozone debt crisis. Investors now want the biggest premium in more than a decade to hold French government debt instead of German bonds. The 10-year French yield is close to 5%, and the selloff has started to reach other southern European bond markets.bankingnews+1

According to Bloomberg, the gap between French and German 10-year yields reached 154 basis points on Friday, Oct. 2. That was on track to be the widest since 2011, when Greece's fiscal troubles set off a market panic. The Wall Street Journal cited LSEG data showing that investors demanded about 1.5 extra percentage points to own French bonds, a day after the spread hit its highest point since 2012. Data providers differ on how far the 10-year yield has risen. CNBC reported in late August that it had passed its 2008 peak. Trading Economics said it reached 4.92% last week, its highest since July 2002. The Sydney Morning Herald said the yield peaked at 4.96% last week and then eased.bloomberg+4

Contagion and foreign selling

Spreads on Italian, Belgian and Greek debt have also started to widen, and on Monday, Oct. 5, the euro fell to a 17-month low against the dollar. Foreigners own more than half of France's sovereign debt, and analysts say that could speed up a selloff. Over the weekend, Sumitomo Mitsui DS Asset Management, a major Japanese asset manager, said it had sold all its French government bonds.bankingnews

Italian and Greek 10-year bonds now yield less than French debt. Both countries have brought their debt under control since the 2012 crisis. Mike Bell of RBC BlueBay Asset Management told The Wall Street Journal that the French-German spread could reach 2 percentage points in the coming months.wsj+1

Politics and the ECB

Prime Minister Sébastien Lecornu has warned that "reality is catching up with us." His draft budget aims to save €54 billion next year to bring the deficit down to 5% of gross domestic product. The plan has set off protests by unions, public workers and students. Bank of France Governor Emmanuel Moulin said "everything possible must be done" to prevent a debt crisis before the presidential election in April 2027.tradingeconomics+2

Investors are asking whether the European Central Bank will step in. To buy a country's bonds through its Transmission Protection Instrument, the ECB must first judge that the country's fiscal policies are sound and sustainable. For France, that would likely mean cuts that are politically difficult before an election. "Securing such backing will not prove politically easy," said Christian Schulz, chief economist at Allianz Global Investors. Eurozone inflation reached 3.8% in September, a three-year high, which limits how far the ECB can ease policy.bankingnews

Robin Brooks of the Brookings Institution wrote that the ECB will hold off for now. If protecting France turns out to be the only way to keep the euro intact, he said, the bank will do it, even at the cost of "sheer horror in Germany and the remainder of Northern Europe."bankingnews