French government bonds are normally one of the quietest corners of the market. France is the eurozone’s second-largest economy, and investors have long treated its debt as a safe place to park savings. This week that changed, and the selling is spreading.
France’s 10-year yield (the rate the government pays to borrow for a decade, which rises when bond prices fall) jumped 12 basis points, or 0.12 percentage points, to 4.87%, a level not seen in about 25 years. The extra yield investors now demand to hold French bonds over German ones, a gauge of how risky France looks, is 136 basis points, near its widest since 2012. The euro also fell to a 17-month low.
The cause is a budget stand-off. France’s deficit is above 5% of GDP, well over the EU’s 3% limit, and a divided parliament has no plan to shrink it. Protesters want more spending while bond markets want less, and April’s presidential election adds to the unease, with a runoff between Marine Le Pen and the hard-left Jean-Luc Mélenchon now looking possible.
For Australia, NSW, Queensland and Victoria bonds have been the hardest hit, with yields up to 7 basis points wider than federal bonds. The federal budget looks better placed, with a deficit under 1% of GDP. The Australian dollar hit 62.31 euro cents, its highest since late 2024, as the RBA’s 4.6% cash rate sits above the European Central Bank’s 2.5%. One strategist sees a silver lining, since governments globally cutting back on spending could ease inflation and let the RBA cut rates without causing a downturn.
Whether Australia stays insulated is still up for debate. The bond market tends to keep rotating its attention, and the US 30-year yield hit a 24-year high this week. If the selling moves to bigger markets, Australia’s clean books may not count for as much as the RBA would like.
