Global Markets: French bond spread at highest since 2012 as default insurance spikes

Investor concerns over France’s stretched finances ahead of next year’s elections drove the risk premium on French government bonds to its highest level since the euro zone debt crisis on Friday, while the cost of insuring the country’s debt also rose sharply.

The spread on French 10-year government bonds over Germany’s rose as high as 104 basis points, exceeding a whole percentage point for the first time since 2012, as investors demand higher compensation for the risk of holding the debt.

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Yields on benchmark 10-year French bonds rose 10 bps to 4.456%. French yields have risen faster than those of any other developed economy in a selloff driven by higher energy prices that has rattled global government debt markets in recent weeks.

France is proving particularly vulnerable in the bond selloff as it faces a challenging budget and struggles to get its fiscal position in order ahead of a presidential election next year that could make that task even harder.

France’s government plans to include a €54 billion ($62 billion) savings drive in its 2027 budget to stop the ​fiscal deficit spiralling out of control, Prime Minister Sebastien Lecornu said on Thursday, as protests over high ‌fuel prices swell.
It will already miss this year’s budget deficit target as the economy will grow less than previously expected this year.”Investors in general they are not too confident in stepping (in) and buying, and I think that’s what is driving this ongoing grind wider in spreads,” said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho in London, adding that the bank was seeing little flow in French debt.

“Everyone is sidelined and not willing to buy here just in case it keeps grinding wider and wider.”

French 5-year credit default swaps, a form of protection against the risk of default, hit 41.5 bps , the highest level since the “Liberation Day” turmoil unleashed by U.S. President Donald Trump’s blanket tariffs in April last year.

They were up nearly 3 bps since Thursday’s close in their biggest one-day increase since mid-March, when the Iran war whipped up market volatility.

French bank stocks were also hit, with BNP Paribas down 3.6%, while Credit Agricole and Societe Generale were each down 2.5%.

France’s blue-chip CAC index was down 1.5%, slightly underperforming other regional indices.