French Bond Yields Near 24-Year High as Fresh Protests Loom

French government bond yields climbed to 4.96% on Tuesday, October 20, close to their highest level since July 2002, as investors faced another round of protests and uncertainty over deficit-cutting measures. Economic Times Markets reported that protest groups had announced demonstrations for Saturday, following weekend unrest that added to the government's fiscal difficulties.

The yield on France's OAT government securities rose 3 basis points after the previous session's increase, which was the largest in nearly a month. French bond prices had fallen on Monday after weekend protests escalated into riots, according to the report. Bond prices move in the opposite direction to yields.

The latest yield remained below the 4.9937% reached in early October. The figures represent the report's market snapshot, rather than closing prices.

French borrowing premium widens

The yield gap between French OATs and German Bunds widened by 5.5 basis points to 152.50 basis points. That spread had reached 158.67 basis points in early October, its widest since November 2011. A basis point is one-hundredth of a percentage point; a wider spread indicates that investors require a larger yield premium to hold French debt relative to German debt.

Italy's spread also increased, rising 4.5 basis points to 113.51 basis points.

Attention was turning to Tuesday's vote on the revenue provisions of France's budget bill. Jamie Searle, European rates strategist at Citi, described it as a useful near-term indication of the budget's progress, even though it was not decisive for the overall process.

Political resistance complicates fiscal plans

A poll published the previous week showed far-right leader Marine Le Pen and hard-left rival Jean-Luc Mélenchon extending their advantage over other candidates. The poll preceded the weekend unrest. Analysts cited in the report regarded that political scenario as particularly difficult for efforts to reduce France's deficit.

Benjamin Schroeder, senior rates strategist at ING, said the demonstrations exposed the resistance any government would face in pursuing reforms and spending savings. His assessment was that right-wing and centrist candidates appeared to benefit from the political fallout, while Mélenchon's presidential prospects had weakened.

That assessment was distinct from the earlier poll: the reported polling results did not measure opinion after the weekend's events. Schroeder also characterised Mélenchon's proposals as among the most contentious.

Energy prices keep ECB rate expectations in focus

German bond yields edged lower even as French yields rose. Germany's benchmark 10-year yield fell 2 basis points to 3.43%, while its two-year yield, which is more sensitive to expectations for monetary policy, declined 1.5 basis points to 3.07%.

The German 10-year yield had largely traded between about 3.40% and 3.50% since the start of October, apart from a decline the previous Thursday as technology shares sold off.

Persistent energy costs continued to limit investors' willingness to reduce bets on further European Central Bank rate increases. Oil prices rose on Tuesday, with Brent near a five-month high. Analysts cited in the report said a sustained retreat in energy prices remained uncertain and that winter weather would be important in determining the direction of gas prices.