France's 10-Year Bond Yield Hits 5 Percent, Highest Since 2002

France's benchmark borrowing cost crossed a line it had not crossed in 24 years on Wednesday. The yield on the 10-year French government bond touched 5.002 percent at 0914 GMT, a new high since 2002, before easing to just below 5 percent, up about 8 basis points on the day, Reuters reported.

The premium investors demand to hold French bonds instead of German Bunds, the euro zone benchmark, stood at about 157 basis points, nearing levels last seen in 2011. The Wall Street Journal, citing Tradeweb and LSEG figures, put the French yield up 6.9 basis points at 4.988 percent in morning trade, with the German Bund at 3.415 percent.

A week of steady selling

French yields have risen more than 16 basis points this week, by far the most among the bonds of the world's largest economies, which have risen by an average of 5.4 basis points, according to LSEG data cited by Reuters. The spread over Bunds is the widest in the euro zone and is edging back toward the early October high of nearly 160 basis points, a 15-year peak. On October 1 the yield had already touched 4.989 percent intraday. Italy has been hit far less hard: its 10-year yields are up 8 basis points this week, half the French increase, leaving the Italian premium over Bunds at 113 basis points.

"The French concerns are still there, even if the domestic unrest seems to have calmed for now," said Deutsche Bank strategist Jim Reid.

Budget politics meet street protests

Bond buyers are pricing two problems at once. The government of Prime Minister Sebastien Lecornu is trying to steer a budget through a divided parliament and bring down a high deficit, put at 5.4 percent of GDP this year with a target of 5.0 percent next year under a consolidation package of about 54 billion euros. Public debt stands at about 119 percent of GDP. On Tuesday the National Assembly postponed a scheduled vote on the revenue section of the 2027 draft budget bill, according to the Assembly's official television channel, a delay the Wall Street Journal reported.

"We thus see little reason to turn optimistic on France," Commerzbank rates strategist Erik Liem wrote in a note cited by the Journal.

The second problem is on the street. Widespread protests over the cost of living turned violent on October 17, with rioting and looting in Paris and other cities. The violence had calmed by Tuesday, but more protests are planned for Saturday. On Tuesday Carrefour, Europe's largest food retailer, cut its targets for operating profit margin growth because of the riots.

Why the level matters

A 5 percent yield is not a technical curiosity. The French state borrows at that rate, and every auction at higher yields adds to an interest bill that already competes with schools and hospitals in the budget. Market borrowing costs also feed into loans and mortgages priced off government bond curves, so a sustained move tightens conditions for households and companies on its own.

The move is part of a global pattern. Government bond yields have risen around the world this year as surging energy prices prompted central banks to raise interest rates, and oil rebounded back above 110 dollars a barrel on Wednesday. What sets France apart is the size of its debt pile and a government too weak, in investors' eyes, to guarantee that its budget plan survives parliament, with a hotly contested presidential election due next year.