France 10-Year Bond Yield Tops 5% for First Time Since 2002

Spread Over German Bunds Widens to 1.6 Percentage Points

Moody's Rating Decision on Oct. 23 in Focus

Concerns over France's public finances have pushed the country's 10-year government bond yield above 5% for the first time since 2002.

Reuters and Bloomberg reported on Oct. 21 that the yield on France's 10-year government bond rose as high as 5.002% during the session. It has climbed 0.2 percentage point this week alone. At the end of February, it was around 3.2%.

The spread over Germany's 10-year bond yield, widely regarded as one of Europe's benchmark safe-haven assets, widened to as much as 1.594 percentage points during the session. That was the widest gap since 2011. The move underscored growing unease in French financial markets.

A selloff in Group of Seven sovereign debt has continued since the Iran war. French bond yields have risen more sharply than those of its peers as uncertainty over passage of the budget bill compounded concerns about public debt equal to 120% of gross domestic product, a widening fiscal deficit and political divisions.

Higher bond yields increase the government's interest burden because maturing debt must be refinanced at higher rates. Rising interest costs could make it harder to reduce the fiscal deficit and further unsettle markets.

Large protests erupted in France over the weekend against high inflation and in favor of greater public-sector investment, adding to upward pressure on bond yields. Some demonstrations turned violent, fueling concerns about broader political and social instability. Geoff Mueller, co-head of fixed income at Morgan Stanley Investment Management, said France's political establishment has shown very little willingness to pursue reforms aimed at restoring fiscal soundness ahead of next year's presidential election. He added that the situation could deteriorate further.

Tensions are also rising ahead of Moody's scheduled announcement on France's credit rating on Oct. 23. France is currently rated Aa3, Moody's fourth-highest grade, with a negative outlook.

Kim Ju-wan, Hankyung.com reporter kjwan@hankyung.com