French debt risk premium reaches euro zone sovereign crisis levels
TLT•France’s 10-year bond yield reached 5.1415%, its highest since July 2002, while its spread over German Bunds widened to 177.7 basis points, the widest since November 2011. Markets priced in about two ECB rate hikes by the end of 2027, with an 80% chance of a third.
1. French bonds weaken
France’s 10-year yield rose 6.5 basis points to 5.06% after touching 5.1415%, and the yield spread over German Bunds widened to 177.7 basis points. Political uncertainty ahead of next year’s presidential election and difficulties passing a budget weighed on French debt, despite an improvement in industrial sentiment in October.
2. ECB and wider markets
The market’s key question is whether the European Central Bank would intervene if tensions intensify. Nomura economist Andrzej Szczepaniak said the bar for intervention was very high. Germany’s 10-year yield fell 7 basis points to 3.34% on safe-haven demand, while yield spreads also widened for Belgium, Italy, Spain and Greece. Money markets priced the ECB deposit rate at 3.15% by the end of 2027, implying two quarter-point increases and an 80% chance of a third.
