Prices on France's 10-year notes slipped on Wednesday, lifting the yield by seven basis points and bringing it to 5 percent for the first time since 2002. France's borrowing premium over comparable German debt widened to 159.4 basis points, and that gauge of euro-area credit risk is now at a 15-year high.
Energy helped steer European bonds midweek, with benchmark European natural gas futures up about 4 percent and Brent crude hovering near 110 dollars a barrel.
Since late September, the France versus Germany spread has climbed quickly as investors question whether Paris can pass a budget that tackles its debt load. Public anger over the cost of living turned into violent protests over the weekend, while a divided parliament has made forging a compromise on next year's budget slow and fraught.
Deutsche Bank AG Chief Executive Officer Christian Sewing pointed to instability in France on both the fiscal and political fronts as a worry, adding that volatility is likely to persist until the presidential elections next year. With that vote only six months away, the budget grind is unlikely to get easier.
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Pooja Kumra, who serves as Toronto Dominion Bank's senior strategist for UK and European rates, said, "Spreads are likely to remain under pressure as attention turns back to the upcoming budget votes." Ven Ram added, "Higher global sovereign yields would also hurt French bonds given their greater sensitivity to moves in peers. I expect Treasury and German long-dated yields to rise on deficit spending and uncontrolled inflation, leaving OATs especially vulnerable."
The euro lagged most Group-of-10 currencies against the dollar, slipping as much as 0.2 percent to 1.1214 dollars. The bottom line: higher energy costs plus budget uncertainty are feeding a fatter risk premium over Bunds, which can translate into more volatility in French rates that ripple into European duration and FX exposures in your portfolio.
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