France’s borrowing costs hit a 24-year high, Eurozone bond markets under pressure

⑴ Eurozone government bond yields rose on Wednesday, with France's borrowing costs leading the gains, reaching their highest since mid-2002. Investors are assessing the fiscal pressures on the government amid widespread protests in France.⑵ After briefly retreating, crude oil prices rebounded above $110 per barrel, further exacerbating negative sentiment.⑶ According to institutional data, France's 10-year government bond yield has risen by more than 20 basis points this week, the largest increase among major global economies, while yields in those economies have risen by an average of about 6 basis points during the same period.⑷ France's 10-year government bond yield touched 5% for the first time since July 2002, closing the day up by about 8 basis points.⑸ The premium on French government bonds relative to German 10-year government bonds is retreating from the nearly 160 basis points 15-year high seen at the beginning of October, with the France-Germany spread around 150 basis points, the widest in the eurozone. This reflects the additional returns investors demand for lending to France instead of Germany.⑹ Public protests in France eased slightly on Tuesday, but more protests are planned for Saturday. Businesses have already felt the financial impact—Europe's largest food retailer, Carrefour, lowered its operating profit growth target on Tuesday due to unrest.⑺ The backdrop is weakened government power in Paris, which is trying to push the budget through parliament and reduce its high deficit, with a fiercely competitive election scheduled for next year.⑻ A senior institutional rates strategist noted that previous warnings about increased public unrest have heightened concerns about France’s ability to implement fiscal consolidation, and the unrest also brings direct costs in the form of GDP losses.⑼ Investors are also watching Italy, where similar cost-of-living protests prompted the Prime Minister on Tuesday to approve stricter anti-riot measures. However, Italian government bonds have not experienced the same sell-off as French bonds this week—10-year yields rose by only about 12 basis points, and the Italy-Germany spread widened by about 4 basis points to 116 basis points.⑽ As the eurozone’s benchmark, Germany's 10-year government bond yield rose by about 4 basis points on the day to approximately 3.43%, holding nearly flat for the week. The 2-year German government bond yield increased by about 3 basis points to approximately 3.09%.