France’s 10-year bond yield breaches 5%, fuelling fears of a credit crisis

• France’s 10-year OAT yield rises above 5%, a level last seen in 2002.
• Government bonds are plunging as investors doubt the French government can secure approval for any substantial savings programme.
• Credit crisis concerns mount as the spread over the German Bund widens to 160 basis points.

The yield on France’s 10-year Obligation Assimilable du Trésor (OAT) has climbed above 5% for the first time since 2002, as surging debt and increasingly uncontrolled social unrest create a perfect storm for the bond market. With investors doubting the French government’s ability to put forward any credible savings programme, mounting fears of a credit crisis are bringing the Euro’s recent recovery to a halt.

At EUR 3.596 trillion in the second quarter of the year, French government debt stood at 119% of GDP, its highest level since the post-war period. The weakened government lacks the parliamentary backing needed to pass any substantial savings programme.

Any measures intended to bring public finances under control are unlikely to win support from the main opposition parties, Lepen’s far right and Melenchon’s far left. Both are biding their time, hoping to turn the government’s unpopularity into victory in next year’s elections.

Spreading riots add to the government’s difficulties

Adding to the pressure, student protests that began a few weeks ago have spread across the country. Violent riots last weekend have prompted the government to introduce partial curfews in several cities this week.

With protests expected to resume on Saturday, French President Emmanuel Macron said on Wednesday that he is meeting intelligence services.

Amid these pressures, the yield gap between France’s 10-year OAT and the German Bund, which is regarded as safer, has widened to 160 basis points, its highest since the 2009-2011 financial crisis. Markets use this spread to gauge the country’s risk premium.