French 10-Year Bond Yield Tops 5%, Highest Since 2002

The yield on France’s 10-year government bonds (OAT) reached 5.002% in morning trading on Wednesday, October 21, according to Bloomberg, the highest level since 2002. Investors are demanding more compensation for holding French debt as the government of Sebastien Lecornu tries to pass the 2027 budget without a parliamentary majority, and the rating agency Moody’s is due to decide on the country’s credit rating on Friday, October 23.

How much have French bond yields risen?

According to Asia Business Daily, the yield rose by 0.2 percentage points this week alone, after standing at around 3.2% at the end of February. Euronews and Asia Business Daily report that the 5% threshold was breached for the first time since 2002. The sources do not fully agree, though: Trading Economics reported on October 2 that the yield briefly broke through 5% on October 1 and 2, while LSEG records a peak of 4.989% for October 1. The safest reading is that the yield crossed 5% again and is at a level not seen since 2002.

The spread over 10-year German bonds, the European benchmark for creditworthiness, stood at about 157 basis points on Wednesday, according to N1. A basis point is one hundredth of a percentage point. During October the spread climbed to around 159 basis points, or 1.594 percentage points according to Asia Business Daily, the widest in 15 years, since 2011, when the debt crisis was spreading across southern Europe.

This is not an abstraction for the wider economy. Euronews notes that the OAT is used to set interest rates across a large part of the economy, so borrowing could become more expensive for businesses and households.

Why does France pay more than comparable countries?

France’s public debt stands at about 120% of GDP, twice the European Union limit of 60%. Lecornu is asking parliament, without a political majority, to approve savings of 43 billion euros. Even if the budget passes, the deficit would only fall to 5% of GDP next year, above the EU limit of 3%.

Pressure is also coming from abroad. Government bond yields are rising around the world this year because of a sharp jump in energy prices, which has pushed central banks to raise interest rates, N1 writes. Asia Business Daily ties the sell-off in G7 bonds to the war with Iran and says France stands out for the size of its bond price decline. Protests add to the strain: over the weekend, demonstrations, among other things for more investment in schools and other public services, turned into the worst street violence in several years, Euronews reports. Presidential elections are also due next year.

Warnings are coming from the market too. Jeff Miller, co-head of the bond department at Morgan Stanley Investment Management, told the Financial Times: “The political will to preserve fiscal discipline ahead of the elections is very low,” and added that “the situation could easily get a lot worse than it is now.”

What can Moody’s do on Friday?

Moody’s currently rates France Aa3 with a negative outlook, and most economists expect a downgrade. Euronews says a downgrade would automatically raise the state’s borrowing costs. Fitch and S&P both hold the rating at A+ with a stable outlook.

What are Bessent, Georgieva and Lagarde saying?

US Treasury Secretary Scott Bessent does not expect the turmoil in the French bond market to spread to other countries. In his words, capital is being redirected toward US government bonds. On France he said:

France is facing a difficult situation, but President Macron’s economic team, which I know very well, is truly first-rate.

International Monetary Fund Managing Director Kristalina Georgieva said last week that France will need time to bring public debt and the budget deficit down to levels that would give citizens and investors full confidence. European Central Bank President Christine Lagarde noted earlier that the solution to France’s worsening financial position must come from within the country, through fiscal policy, which, according to B92, dampened expectations that the ECB might step in.

Moody’s decision on France’s rating is scheduled for Friday, October 23.