French debt risk premium reaches euro zone sovereign crisis levels

By Stefano Rebaudo

Oct 22 (Reuters) - The premium investors demand to buy France's 10-year government bonds against safe-haven Bunds reached a fresh 15-year high on Thursday as concerns about the country's ability to repair its public finances, coupled with ongoing street protests, continued to weigh on sentiment.

French ministers have promised a vastly reinforced security operation during more planned protests this coming Saturday, with troops expected to be deployed alongside additional police. 

France's benchmark 10-year yield rose 11.5 basis points (bps) to 5.11%, after reaching 5.1415%, its highest level since July 2002.

That pushed the French risk premium over German Bunds up to 173.58 - its widest since November 2011 during the euro zone debt crisis - reflecting investor unease about France's current fiscal outlook.

Political uncertainty ahead of next year's presidential election in France and Paris' difficulties in passing a budget have further weighed on market sentiment. 

"There exists a consensus that Europe is better equipped today to deal with crises, and that European institutions are stronger today than they were 15 years ago, which should make a European response easier to put together," Giada Giani, an economist at Citi, said, referring to differences between France today and euro zone periphery countries in the early 2010s. 

"But re-emerging euroscepticism is a constraint here," she added.

The selloff in French government bonds persisted despite data showing industrial sentiment improved in October. 

Charlotte de Montpellier, senior economist, France and Switzerland at ING, underlined that the rebound was a welcome surprise, recalling that when business confidence data was collected, the nature of the risk included political and financial consequences of social unrest.

BUNDS RISE ON SAFE-HAVEN BIDS

Borrowing costs have risen this year as higher energy prices fuelled expectations of a hawkish central bank response, putting pressure on the bonds of highly indebted countries such as France. Bets on European Central Bank rate hikes have been quite stable in the last few weeks at around three additional tightening moves by late 2027.

Germany’s 10-year government bond yields, the euro area benchmark, were down 4 bps to 3.38%, supported by safe-haven demand, despite a rise in oil prices.

Brent crude futures rallied over $2 a barrel on Thursday after more Houthi attacks in Saudi Arabia, while natural gas prices were just off their highest since December 2022.

Yield gaps over Bunds widened across the euro zone, with Belgium's spread widening more than 10 bps to 111.28 bps, its highest since 2012, while Italy's rose 10.5 bps to 123 bps, Spain's widened 7.5 bps to 71 bps and Greece's increased 8.5 bps to 102 bps.

The German 2-year government bond yield, more sensitive to policy rate expectations, fell 0.5 bps to 3.08%. 

ECB chief Christine Lagarde said at the end of last month, when markets were pricing almost four hikes by late-2027, a moderate policy response from the ECB remained appropriate.

Expectations for the ECB's rate path edged higher, with money markets pricing the deposit rate at 3.26% by late 2027, up from the current 2.50%, while expectations for December stood at 2.73%.

(reporting by Stefano Rebaudo; Editing by Toby Chopra)