France's 10-year bond yield is pinned near its highest level since 2002, and the premium investors demand over German Bunds has widened past 140 basis points — its widest since the 2012 Eurozone debt crisis. The sell-off has also pushed the euro toward a 17-month low, while an ECB policymaker warns that energy costs and shifting AI sentiment leave the rate outlook unusually uncertain.
French government bond yields are set for a fifth straight weekly rise, with the 10-year OAT lingering close to 4.96% after investors gave a cool reception to Paris's 2027 draft budget. The government's fiscal plan failed to reassure markets over its ability to rein in a deficit projected at 5.4% of GDP.
Spread over Bunds widens to crisis-era levels
The gap between French and German borrowing costs has pushed past 140 basis points, its widest since the height of the Eurozone sovereign debt crisis in 2012. Deutsche Bank strategist Jim Reid noted the Franco-German 10-year spread's daily jump of 13.9 basis points was its biggest since March 2020, at the height of the Covid turmoil.
According to Reid: "mounting signs of financial stress focused on Europe" marked the moves.
That widening rift drove safe-haven demand into German debt. Germany's 10-year yield fell to 3.475%, its fourth straight session of declines and on track for its first weekly drop in eight weeks.
Euro slips toward 17-month low
France's government tried to calm investors by proposing €43 billion in budget cuts and tax rises for next year. Even with the plan, the budget deficit would only fall to 5% of GDP, and analysts at ING warned the reduction would be too high to stabilize France's national debt, already at 119% of GDP.
The euro has fallen toward a 17-month low, dropping more than 0.75% to €1.1214 as concerns over French debt spread across the single currency bloc. Swissquote analyst Ipek Ozkardeskaya said weakening appetite for French debt is a problem for the broader euro area, since France was once considered part of the bloc's core alongside Germany.
ECB's Rehn flags energy and AI risks
ECB governing council member Olli Rehn said higher energy prices bring the bloc closer to the central bank's adverse inflation scenario, while also warning of a possible sudden reversal in market sentiment toward AI. Rising long-term interest rates, he added, will slow growth and curb how much of the energy shock companies can pass through to prices and wages.
Market pricing now puts the odds of an October rate hike at around 27%, down from last month, when traders were more confident a 25 basis-point hike was coming in December; a December hike is now priced closer to 64%. Traders are also watching Friday's Eurozone flash inflation reading, expected to accelerate to 3.6% from 3.2% in August, alongside the US non-farm payrolls report due the same day.
Sources: Investing.com, The Guardian, InvestingLive
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