French Bond Yields at 2002 High as Fiscal Concerns Deepen

France’s 10-year OAT yield surged above 4.9%, reaching its highest level since July 2002, after posting its biggest quarterly increase in nearly four decades. The move came as the minority government unveiled its long-awaited plan to rein in the budget deficit, targeting a reduction to 5% of GDP next year from 5.4% this year. The plan has already drawn scrutiny from the country’s fiscal watchdog, which warned that the budget’s economic assumptions are “optimistic.” French borrowing costs have also risen sharply amid a global bond selloff, with the 10-year yield spread over Germany widening to 130 bps, the highest since 2012, reflecting growing concerns over debt sustainability. With the debt burden expected to exceed 120% of GDP next year and political uncertainty ahead of April’s elections, interest costs are set to climb. Meanwhile, Agence France Trésor plans a record €340 billion of borrowing to finance the deficit and refinance maturing debt.

French 10Y OAT yield surged to 4.95%, touching its highest level since July 2002, after recording their biggest quarterly increase in nearly four decades. The government is set to unveil a €54 billion fiscal consolidation plan aimed at reducing the budget deficit to 5% of GDP in 2027 from 5.4% this year. The measures are expected to target pensions, public-sector wages and other politically sensitive spending, while extending a one-off tax on large companies. France’s borrowing costs have risen sharply amid a global bond selloff, with the 10-year yield spread over Germany widening to 127 bps on Wednesday, near levels last seen during the euro-area debt crisis. A debt burden expected to exceed 120% of GDP next year and political uncertainty ahead of April's elections are also driving up interest costs, with the government forecasting a €91 billion bill in 2027. Agence France Trésor also plans a record €340 billion of borrowing in 2027 to fund the deficit and refinance maturing debt.

France’s 10-year OAT yield fell below 4.8% after reaching its highest level since July 2008, as markets became more cautious about further central bank rate hikes. Still, yields rose 60 bps in September, their biggest monthly increase since December 2022, and more than 110 bps since early July, marking their largest quarterly jump since 1987. Concerns over France’s public finances intensified amid a large primary deficit and a fragmented parliament, while higher energy costs, inflation risks and expectations of AI-driven growth reinforced bets on higher-for-longer rates. Sentiment improved on Wednesday as central bankers pushed back against expectations of rapid tightening. ECB official Peter Kazimir said the central bank has time to keep policy flexible after two rate hikes this year, echoing President Christine Lagarde. In the US, Fed President John Williams similarly said there was time to assess incoming data before raising rates again.