French government bond yields approach 5%, and the spread between French and German bonds reaches the highest level since 2012

(1) On Thursday, the yield on France’s 10-year government bonds rose to around 4.96%, the highest since July 2002, just one step away from the 5% mark. (2) The French government is scheduled to announce the 2027 budget later that day, with the bond market coming under significant pressure beforehand. (3) In recent weeks, concerns over rising interest rates, soaring debt, and escalating political risks ahead of the 2027 presidential election have led to sustained selling of French bonds. (4) UBS rates strategist Reinout De Bock stated that worries have expanded from the overall fiscal figures to the composition of the approximately 54 billion euro consolidation plan, uncertainty surrounding the presidential election and subsequent parliament, as well as absolute yields returning to 2000s levels. (5) The yield spread between French and German 10-year government bonds widened to about 133 basis points, the highest since May 2012. This spread is seen as a measure of the risk premium required to hold French debt. (6) France’s public debt management agency stated on Tuesday that France will issue a record volume of bonds to investors next year. (7) Commerzbank rates strategist Erik Liem said French media reported the government expects interest expenses in 2027 to be about 10 billion euros higher than budgeted a year ago, but the related forecasts may not reflect current yield curve levels. A downward revision of growth forecasts will make the 5% deficit target even harder to achieve. (8) Italian government bonds also weakened, with their yield spread over German bunds widening to about 107 basis points, the highest since May 2025. (9) Eurozone government bond yields climbed on Thursday, after recording their largest quarterly rise since 2022. The intensifying energy shock continues to support market bets that the European Central Bank will hike rates at least three more times by the end of 2027. (10) The yield on German 10-year government bonds was around 3.62%, having touched 3.65% earlier this week, the highest since June 2009. (11) Brent crude oil futures rose again on Thursday, surpassing $100 per barrel and fueling inflation concerns while reinforcing expectations for further global rate hikes. (12) The yield on German 2-year government bonds was flat at about 3.19%, up roughly 66 basis points for the quarter—the largest quarterly increase since the fourth quarter of 2022. Money markets expect the European Central Bank's deposit rate to rise to around 2.81% by December and about 3.42% by the end of 2027, from the current 2.50%.