French bond contagion fears are rattling the euro
TLT•The euro fell to a 17-month low below $1.12 and was down more than 4% this year as French borrowing-cost concerns spread across euro-area bond markets. The French-German 10-year yield gap reached its widest since the euro debt crisis, while the Italian-German gap rose to nearly 130 basis points.
1. Bond market stress
Investors have sold French bonds and bought German debt as France seeks to enact a 2027 budget to reduce its deficit and contain record-high debt. The French-German yield gap had its biggest weekly jump in decades, while the Italian-German gap posted its largest weekly rise since the COVID-19 crisis.
2. Euro under pressure
The euro hit lows below $1.12 and fell against sterling, the Swiss franc and the yen. Analysts said the currency could test $1.10; BofA FX strategists estimate each additional 10-basis-point widening in the French-German spread would be associated with a 0.4% fall in euro/dollar.
3. Policy and market risks
The article said further euro weakness could complicate the European Central Bank’s response to rising inflation and borrowing costs. The ECB’s Transmission Protection Instrument allows it to buy an unlimited number of bonds from a country facing an “unwarranted, disorderly” tightening of financing conditions.
