French yields stop just short of 5% amid fiscal concerns

By Stefano Rebaudo

Oct 1 (Reuters) - French 10-year government bond yields eased after jumping to their highest level since 2002 on Thursday, as the government unveiled its 2027 budget amid concerns about the country's fiscal trajectory.

French bonds have come under selling pressure in recent weeks on expectations for rising policy rates, high debt levels and growing political risk as a 2027 presidential election looms.

France’s 10-year government bond yields fell 1.5 basis points (bps), after hitting 4.9629%, the highest level since July 2002.

"Concerns have broadened beyond the fiscal headline to the composition of the €54 billion consolidation (plan), uncertainty around the presidential election and the parliament that follows, and outright yields returning to levels not seen since the 2000s," said Reinout De Bock, rate strategist at UBS.

The gap between French and German government bond yields — a market gauge of the risk premium investors demand to hold French debt — was at 127 bps after hitting 133.18 bps, its highest level since May 2012.

The French government will sell a record amount of bonds to investors next year, the public debt management office said on Tuesday.

France presented its 2027 budget bill on Thursday, seeking to enact unpopular belt-tightening measures that can lower its deficit.

Analysts argued that a potential downward revision to France's growth forecasts could make it even harder for the government to meet its 5% deficit target.

"There has been widespread irritation within the European Union at the French reluctance to improve its fiscal position, and there is some hope that a wider spread may force policy makers to take more steps to put France on a more sustainable path," Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, noted.

"However, fiscal consolidation remains unpopular with a French electorate which has become accustomed to being able to live beyond its means, and so it may be unlikely to expect much improvement this side of the 2027 presidential election," he added.

Italian government bonds also sold off, pushing their yield spread over safe-haven Bunds up to 108.22, the widest since May 2025.

BOND YIELDS DROP

Euro zone government bond yields fell from multi-year highs after posting their biggest quarterly rise since 2022 on Wednesday, as investors paused after the recent selloff.

A deepening energy shock continued to underpin bets on at least three European Central Bank rate hikes by late 2027.

Germany’s 10-year government bond yields , the euro zone benchmark, dropped 3 bps to 3.54% after reaching 3.6526% on Monday, their highest level since June 2009. They climbed 71.5 bps in the third quarter, their biggest rise since 2022.

Brent oil futures rose on Thursday, again exceeding the $100 mark, adding to inflation concerns and cementing expectations of further interest-rate hikes globally.

Germany's 2-year government bond yield , more sensitive to policy rate expectations, was down 3.5 bps at 3.15%, after hitting 3.3276% on Monday, its highest level since September 2023. It posted a 66-bp quarterly rise, the biggest since the last quarter of 2022, when it climbed by 95 bps.

Money markets priced the ECB's deposit rate at 2.78% by December , implying one quarter-point rate hike and a small chance of a second tightening move. They also saw the policy rate at 3.34% by late 2027, compared with the current 2.50%.