French 10-year bond yields reached 4.98% on Wednesday, close to the 5% level last seen in 2002. Investors cite political instability and strained public finances, and Moody's issues a ratings decision on Friday.
French 10-year bond yields rose 0.06 percentage points to 4.98% on Wednesday after a fresh bout of selling. That brings the increase so far this week to 0.19 percentage points, and leaves France's long-term borrowing costs close to a benchmark last hit in 2002.
Unrest and politics weigh on French debt
Investors are growing concerned about the stability of French politics and the state of public finances. The moves follow days of unrest in which peaceful demonstrations over the cost of living and education spiralled into widespread rioting and looting.
Yields have surged from 3.2% in late February. France had been the hardest hit in a sweeping sell-off in G7 bond markets, as the Iran war stoked inflation and put economies with large debt piles and wide budget deficits under particular pressure. Bond yields rise as prices fall.
Spread against Germany nears Eurozone crisis levels
The gap between French and German 10-year borrowing costs rose near to 1.6 percentage points on Wednesday, very close to the intraday high reached in volatile trading earlier this month. The level had previously not been seen since the Eurozone debt crisis more than a decade ago.
According to Jeff Mueller, co-head of fixed income at Morgan Stanley Investment Management: "The political willingness for any fiscal consolidation ahead of the election is very, very low".
Moody's decision due Friday
John Stopford, head of multi-asset income at Ninety One, argued that the path of least resistance was a wider French spread heading towards April's presidential election. He added that the European Central Bank would be unlikely to step in without a significant deterioration from current levels.
Moody's will issue a ratings decision on France on Friday, and a downgrade is a real possibility given the outlook is already negative on the current Aa3 rating.
Source: Financial Times
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