Euro zone bond yields rise as French borrowing costs hit 24-year high

Euro zone bond yields rose on Wednesday, led by another increase in French borrowing costs to their highest since mid-2002, as widespread French protests added to concerns over ‌the country's fragile finances and political uncertainty. A rebound in crude oil prices above $110 a barrel after a brief retreat the previous day added to pressure on bond markets.

France's benchmark 10-year OAT yields hit 5% for the first time since July 2002, rising 8 basis points on the day and more than 20 bps this week. That was the sharpest ‌weekly increase among major bond markets, where yields rose by an average of 5.7 bps, LSEG data showed.

The premium on French yields over benchmark 10-year Bunds has ‌also been edging back towards early October's 15-year high of nearly 160 bps. The French-German yield spread, which reflects the additional return investors demand for holding French debt, stood at 150 bps, the widest among major euro zone sovereign bond markets.

"It's starting to look quite stressed. The OAT-Bund spread has been going in one direction for a while," said Rushabh Amin, portfolio manager at Allspring Global Investments. Amin said the ⁠widening spread ​raised concerns that the European Central Bank ⁠might eventually need to consider measures similar to those used during the euro zone debt crisis.

"I don't think we're at that level yet because it's not widespread beyond France," he added. The French unrest ⁠had eased somewhat by Tuesday, but more protests are planned for Saturday and companies are feeling the financial impact. On Tuesday, Carrefour, Europe's largest food retailer, cut its targets for operating ​profit margin growth because of the riots.

Lale Akoner, global market strategist at eToro, said the selloff reflected growing investor frustration with political paralysis and weak public ⁠finances. "A 5% yield looks tempting, but further losses could outweigh the income if investors demand an even bigger premium," Akoner said, adding that the passing of a French budget could provide some relief, though sustained ⁠recovery ​would require a credible plan to stabilise debt.

A weakened French government is struggling to pass a budget and reduce a large deficit ahead of a hotly contested election next year. Amin said that Allspring remained relatively underweight in French bonds but was considering shifting towards a neutral or even overweight position relative to markets including ⁠Canada, Britain and the United States.

Investors are also watching Italy, where cost of living protests prompted Prime Minister Giorgia Meloni to approve tougher anti-rioting measures on Tuesday. Italian bonds ⁠have fared better than French debt ⁠this week, with 10-year yields rising by only 12 bps.

The Italian-German 10-year yield spread widened by 4 bps on the day to 116 bps, while Italian 10-year yields rose by 8 bps to 4.6047%. German 10-year yields were up 3.4 bps at 3.4274%, ‌little changed this week, ‌while two-year yields rose 4 bps to 3.0940%.