Euro zone bond yields rise as French borrowing costs hit 24-year high

By Amanda Cooper

LONDON, Oct 21 (Reuters) - Euro zone bond yields rose on Wednesday, led by another increase in French borrowing costs to their highest since mid-2002, as investors took stock of the widespread French protests pressuring a government struggling to shore up its finances.

A rebound in crude oil prices back above $110 a barrel, after a short-lived drop the previous day, added to the negative sentiment.

France's benchmark 10-year OAT yields have risen more than 20 basis points this week, by far the most among bonds of the world's largest economies, which have risen by an average of 5.7 bps, LSEG data shows.

French yields hit 5% for the first time since July 2002 and were last up 8 bps on the day at that level.

The premium on French yields over benchmark 10-year Bunds has also been edging back towards early October's 15-year high of nearly 160 bps.

This discrepancy in yields reflects the extra return investors demand for lending to France rather than Germany. The French-German spread is by far the widest in the euro zone, at 150 bps.

The civil unrest had eased somewhat by Tuesday, but more protests are planned for Saturday and companies are feeling the financial impact. On Tuesday, Carrefour CARR.PA, Europe's largest food retailer, cut its targets for operating profit margin growth because of the riots.

In the background, a weakened government in Paris is trying to push a budget through parliament and bring down a high deficit ahead of a hotly contested election next year.

"We had cautioned that the public unrest was adding to concerns around France's ability to consolidate its finances. The unrest also adds very direct costs in terms of lost GDP," said senior ING rates strategist Benjamin Schroeder.

Investors are also keeping an eye on Italy, where similar protests over the cost of living prompted Prime Minister Giorgia Meloni to approve tougher anti-rioting measures on Tuesday.

Italian bonds have not suffered the same kind of punishment as French debt this week. Italian 10-year yields have risen only 12 bps so far, which left the premium of Italian BTPs to Bunds 4 bps wider on the day at 116 bps. Italian 10-year yields were up 8 bps at 4.602%.

German 10-year yields, which serve as the benchmark for the wider euro zone, were up 4 bps on the day at 3.428%, almost unchanged this week, while 2-year German debt yields rose by 3 bps to 3.086%.