French bond yields near 24-year high as selloff resumes

Investors sold French government bonds again on Thursday. The 10-year yield rose 6 basis points to 4.931%, close to the 24-year high of 4.994% it reached last Friday, Reuters reported. The gap between French and German 10-year yields widened 4 basis points to 142 basis points. It had climbed to nearly 160 last week, its highest level since 2012.economictimes

The renewed selling came amid a global bond rout. Higher energy prices are adding to expectations that central banks will keep raising rates, and investors are pulling back from heavily indebted countries such as France and Italy. Germany's 10-year yield rose only 2 basis points to 3.504%, helped by demand for safe assets.economictimes

Energy and a global rout

Brent crude rose about 3% to around $103 a barrel on concerns about Middle East supply, which deepened worries that inflation will stay high. The 10-year U.S. Treasury yield hit its highest level since 2002 on Wednesday. The euro is trading just under $1.12, near a 17-month low. Speculators held a record number of futures contracts betting the euro will fall.fxstreet+1

France's government has proposed a 43 billion euro fiscal package meant to cut the deficit from an expected 5.4% of GDP this year to 5.0% in 2027. Getting it through parliament will be difficult. The country's debt is approaching 120% of GDP, and the presidential election is next year.global.morningstar+2

No ECB backstop for now

Banque de France Governor Emmanuel Moulin said on Wednesday that France does not currently need support from the European Central Bank. He said the strain is serious but does not meet the conditions for ECB help. "If we don't act, there is indeed a risk of being gradually strangled by rising interest rates," he told the Financial Times.global.morningstar+2

Commerzbank chief economist Jörg Krämer described a possible four-step ECB response. It could start with softer guidance on rates, then restart reinvestments under the pandemic emergency purchase program aimed at French debt, and only as a last resort activate the Transmission Protection Instrument. ECB chief economist Philip Lane is scheduled to speak later on Thursday.economictimes+1

Watching Spain and Portugal

Analysts disagree about how far the stress could spread. Angel Talavera of Oxford Economics told CNN the chance of contagion was "very high". Italy's spread over Germany has widened from 80 to 130 basis points in a month, and Greek spreads are at a two-year high. Morgan Stanley's Jeff Mueller said real contagion would show up if spreads widened in Spain and Portugal, which has not happened so far. Spain now borrows for 10 years at about 75 basis points less than France.europeanbusinessmagazine+1

ING's Carsten Brzeski said wider French spreads on their own would not trigger ECB intervention. "A more convincing case for TPI would be spread widening that shows contagion across several eurozone countries," he said.global.morningstar