French government bonds have fallen amid mass protests

In France, on October 19, the sell-off of government bonds accelerated amid mass protests and concerns about the state of public finances. The yield on ten-year debt securities of the country approached 5% per annum, increasing the cost of new borrowing for the government.

This was reported by Financial Times, The Guardian and The Wall Street Journal, citing financial market data.

During trading, the yield on ten-year French bonds rose by approximately 0.14 percentage points, reaching 4.93% per annum. This is one of the highest levels in the last two decades.

At the same time, the difference between the yields on ten-year bonds of France and Germany increased to 1.47 percentage points. This indicator reflects the additional premium that investors demand for investing in French government debt compared to German bonds, which are considered among the most reliable in the eurozone.

Investors fear a deterioration in France's budget situation

The sell-off of debt securities intensified after mass unrest that swept through French cities over the weekend of October 17–18. Protests against the high cost of living and insufficient funding for public services were accompanied by clashes with police, arson and looting of commercial establishments.

According to the French Ministry of the Interior, about 2,400 people were detained over the weekend. President Emmanuel Macron condemned the violence, and the government began preparing additional security measures.

However, the main concerns of financial market participants are not only linked to the unrest. Investors doubt that the French authorities will be able simultaneously to meet the protesters' demands for increased social spending and fulfill plans to reduce the budget deficit.

France's public debt already exceeds 119% of gross domestic product, and the budget deficit remains above the 3% target established by EU rules.

The government is preparing a budget for 2027, which should provide for spending cuts and stabilization of public finances. However, mass protests and political disagreements make it difficult to carry out unpopular budget reforms.

An additional factor of uncertainty is the presidential elections in France scheduled for 2027. Market participants are accounting for the risk of further escalation of the political situation.

The fall in bonds also affected the stock market

The negative reaction of investors spread to shares of French companies.

The main stock index of the Paris stock exchange, CAC 40, was down approximately 1.4–1.5% during trading on October 19. Among the companies that came under pressure from sellers were the largest French banks BNP Paribas and Société Générale.

Shares of financial institutions are especially sensitive to changes in the value of government debt, since banks hold significant bond portfolios and depend on financing conditions.

At the same time, the yield on ten-year Italian government bonds rose to approximately 4.57%. This indicates that concerns about budget risks affect not only the French debt market.

On the foreign exchange market, the euro also declined against the US dollar. During trading, the single European currency lost about 0.2–0.4% of its value.

France will have to pay more to attract new loans

The rise in bond yields means a decrease in their market value. For the state, this is also a signal of a possible increase in the cost of new borrowing and refinancing of existing debt.

If higher rates persist, France will have to allocate more budget funds to service government obligations. This could further complicate the government's plans to reduce the deficit.

For October 23, a regular review of France's credit rating by Moody's is scheduled. Investors will closely monitor the assessment of the country's fiscal sustainability and a possible change in the rating.

Meanwhile, Goldman Sachs analysts note that the eurozone now has a more resilient banking system and additional financial protection mechanisms compared to the debt crisis of 2011–2015. Therefore, the rise in French bond yields alone does not mean the beginning of a new Europe-wide debt crisis.

The further dynamics of French government bonds will depend on the situation with the protests, negotiations around the 2027 budget and the government's ability to convince investors of the sustainability of public finances.

Based on materials from: Financial Times, The Guardian, The Wall Street Journal.