France's bond market hit rare turbulence this week as political unrest layered on top of concerns about the country's finances. Bloomberg data show the yield premium on French 10-year debt over German bunds rose by 29 basis points, a move that ranks as the second biggest weekly widening in records dating to 1990.
That gap is now around 1.7 percentage points, more than twice what it was in May. Spreads have pushed to levels last seen at the height of the euro area debt crisis in 2011, a reminder of how quickly confidence can shift when debt loads are heavy and growth is slow.
Investors worry France faces a difficult path given its sizable debt, a sluggish economy, and public anger that has spilled into unruly street demonstrations. Business leaders are also uneasy heading into the weekend amid fears of more protests.
Craig Inches, who oversees rates and cash strategies for Royal London Asset Management, said, "People have got positions that they're starting to worry about and they're starting to think I don't want to be in this trade anymore." Some point to hedge funds as amplifying the swings, particularly in short-dated French bonds that were hit hard this week.
RBC BlueBay Asset Management's chief investment officer, Mark Dowding, said, "Memories of investing through the euro sovereign crisis remain firmly etched into our memories." He said buyers who once stepped in when French bonds traded 50 basis points over Germany are now absent, leaving prices more sensitive to trend-following strategies.
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Even Mario Draghi recently said the European Central Bank is unlikely to intervene for France any time soon. The former ECB president noted the region is far from a repeat of the earlier crisis, making support from Frankfurt a distant possibility for now.
TwentyFour Asset Management portfolio manager Felipe Villarroel said, "French government bonds keep on breaking records and psychological barriers." "Traders need a catalyst to take long positions, and the plausible but unspoken threat of some grand scale intervention is not going to make the cut just yet."
There was a brief respite on Friday, with French 10-year paper rallying alongside other risk assets and the spread to Germany narrowing by seven basis points, the biggest single-day tightening since Oct. 6. Still, the tone remains cautious.
Anthony Brinkman, high yield portfolio manager at Principal Asset Management, said, "The writing has been on the wall somewhat for a long period of time," adding that "Fiscal credibility has become very much a global investment theme, and I think markets will continue to price that accordingly." Investors now look to Moody's scheduled update later Friday. France is rated Aa3 with a negative outlook, one notch above S&P and Fitch. A downgrade is anticipated; if it occurs, it would remove France's last major double A rating and mark another warning about its deteriorating debt trajectory.
The bottom line: spreads are moving fast, liquidity looks thinner, and headline risk is elevated. Keep an eye on rating actions and the protest calendar - both are steering how much extra yield the market demands from France.
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