French yields near 24-year high as new protests announced

French government borrowing costs rose again on Tuesday, Oct. 20, after protest groups announced new demonstrations for Saturday. The 10-year OAT yield gained 3 basis points to 4.96%. That is close to the 4.99% it reached in early October, its highest level since July 2002, according to Reuters. The gap between French and German 10-year yields widened by 5.5 basis points to 152.5. Investors use that spread to measure French risk, and it peaked at 158.67 in early October, the widest since November 2011.money.usnews.com

The move came after a sell-off on Monday, Oct. 19, which followed a weekend of violent protests over living costs. Investors now doubt that Paris can push deficit cuts through a divided parliament before next year's presidential election.

Monday's sell-off

On Monday, French bonds, Paris-listed stocks and the euro all fell after some of France's worst unrest in years. Thousands of people were arrested and shops were looted during protests over high prices and declining public services, Reuters reported. The 10-year yield jumped 13 basis points to about 4.9%, its biggest one-day rise in almost a month. Prime Minister Sébastien Lecornu did not rule out declaring a state of emergency.galvnews.com

The CAC 40 was the weakest major European index. BNP Paribas and Societe Generale Société Générale S.A. each fell about 3%. Carrefour also declined after its chief executive said protest damage would cost the retailer tens of millions of euros. The cost of insuring French debt against default also went up.

A protest movement that began over conditions in schools "morphed into broad protest against the rising cost of living, declining public services and overall frustration against the Macron administration," KBC Bank analysts wrote, according to The Wall Street Journal News Corp ↗ 1.52%. President Emmanuel Macron condemned the "unbridled violence" in a televised address on Sunday night, The Guardian reported.wsj.com+1

Budget and ratings tests

On Tuesday, French lawmakers are voting on the revenue side of the budget bill. Jamie Searle, a rates strategist at Citi Citigroup Inc. ↗ 0.67%, said the vote "takes on a little more importance as a near-term signal," Reuters reported. "The protests highlight that any government will struggle to implement the required reforms and savings against broader public resistance," said Benjamin Schroeder of ING ↗ 0.43%.reuters.com

France's public debt is above 119% of GDP, The Wall Street Journal reported. Moody's ↘ 1.23% is scheduled to review France's rating on Friday, Oct. 23, and a downgrade is possible. Analysts at Commerzbank expect a limited effect on spreads because Moody's "is merely catching up with other rating agencies," according to Reuters.fidelity.com+1

Elias Hilmer of Capital Economics expects the French-German spread to widen to 200 basis points by the end of 2027, Business Insider reported. "Given the perilous state of France's public finances and the uncertainty around the elections, we think French spreads may widen further over the coming year," he wrote.finance.yahoo.com