French Bond Yields Hit 5%, the Highest Level Since 2002

What happened

French bond yields crossed a line markets had not seen in 24 years. On Wednesday, Oct. 21, the yield on France’s benchmark 10-year government bond touched 5.002% shortly after 9 a.m. GMT, Reuters reported. That was up about 8 basis points (0.08 percentage point) on the day and the highest level since 2002. It then eased to just under 5%.

The gap between French and German 10-year yields, a common gauge of how much extra risk investors see in France, widened to about 157 basis points. Reuters said that is close to levels last reached in 2011, during the eurozone debt crisis.

The move came days after protests over living costs turned into riots across France, and while a minority government is trying to push a deficit-cutting budget through a divided parliament.

What a 5% yield means

A bond yield is roughly the annual interest rate a government pays when it borrows. When investors worry about getting paid back, or expect higher inflation and interest rates, they demand a higher yield before they will lend.

Existing bonds don’t change their payments, so a higher yield shows up mostly on new borrowing. France issues new debt every year to cover its deficit and to repay old bonds as they come due. Some simple arithmetic shows why the level matters: every extra percentage point on €10 billion of new 10-year debt adds about €100 million a year in interest, every year for a decade.

ING economists estimated in early October that France’s interest bill would rise by €12 billion in 2027, to €91 billion, in their read of the draft budget. That was before yields climbed further.

Why borrowing costs jumped

Several pressures are stacking up at once, according to the sources reviewed for this explainer:

• A global rise in yields. Government borrowing costs have climbed in many countries this year after an energy price surge pushed central banks to raise interest rates, Reuters noted. France’s rise has been steeper than most of its peers.
• A big deficit and record debt. Public debt is about 119% of GDP, a record, according to Euronews. The deficit is expected to hit 5.4% of GDP this year.
• A fragile government. Prime Minister Sébastien Lecornu leads a minority government, and his 2027 budget is moving slowly through the National Assembly.
• Unrest and an election ahead. Widespread protests and a presidential election due in April and May 2027 add to investor uncertainty. Uptick covered the weekend riots in our France protests explainer.

The numbers

Put the spread figures side by side and the trend is clear: the premium France pays over Germany nearly doubled in about seven weeks, rising roughly 71 basis points since early September. In early October, ING expected the spread to test about 150 basis points. It has now gone past that.

The budget fight

Lecornu’s plan aims to cut the deficit to 5% of GDP in 2027, partly by limiting pension increases and freezing public-sector pay. Without changes, he warned in September, the deficit would approach 6.5%.

The bill has had a rough ride. A vote on the tax side of the budget, set for Tuesday, Oct. 20, was pushed back to Oct. 27 because so many amendments were still pending, Reuters reported. Budget Minister David Amiel warned that amendments already approved would add €10 billion to the deficit.

Parliament has 70 days to debate the bill. If lawmakers stall, the government can use Article 49.3 of the constitution to adopt the budget without a vote, but opponents can answer with a no-confidence motion. If that motion passes, the budget falls with the government.

What happens next

• Friday, Oct. 23: Moody’s has a scheduled review of France, according to the French debt agency’s ratings page. Moody’s currently rates France Aa3 with a negative outlook, which signals a possible downgrade.
• Tuesday, Oct. 27: The delayed vote on the tax side of the budget.
• Nov. 27: S&P’s next scheduled review. S&P rates France A+ with a stable outlook.
• Late November to mid-December: Key budget deadlines. If no budget passes by Jan. 1, a special law would keep taxes and essential spending running.

The International Monetary Fund said earlier this month that the rise in French yields was manageable for now but could cause more strain if borrowing costs stay high, Finance Monthly reported. The same report noted that a wider spread does not by itself mean a debt crisis is imminent.

Quick answers

Why are French bond yields rising?

Investors are asking for more interest because of France’s large deficit, record debt, a weak minority government struggling to pass its budget, nationwide protests and an election next spring, on top of a global rise in borrowing costs.

When were French yields last this high?

The 10-year yield last reached 5% in 2002, according to Reuters, which is before the euro debt crisis of 2010 to 2012.

Does this affect people outside France?

Mostly indirectly. Analysts cited by Finance Monthly said a long stretch of higher yields could raise borrowing costs for French companies and lead investors to take a harder look at other heavily indebted European countries.