Economy

French ten-year bond yield approaches five percent, highest since 2002 with German spread above 1.5 points

Economists ask whether a new eurozone crisis has begun

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France's ten-year government bond, the Obligation assimilable du Trésor, is trading close to five percent — the highest level since 2002, and up from about 3.5 percent in June. The yield has jumped more than 100 basis points since early August, and the spread over German bunds has widened past 1.5 percentage points, a gap once characteristic of the eurozone's southern borrowers.

In a global bond sell-off that began with the year and intensified with the Iran war, the eurozone's second-largest economy has moved further than almost anyone. Vikram Rai, senior economist at TD Bank, says France stands out among its developed-market peers: long-term yields have risen across major markets, but French bonds have seen an outsized move, reflecting political uncertainty and a weak fiscal outlook. Doug Porter, chief economist at the Bank of Montreal, wrote in an October 2 note that the sell-off took "a darker turn" that week, with yields across much of Europe ratcheting higher — especially France's.

The debt behind the move is close to 120 percent of GDP, twice the level EU rules prescribe, as Yoshio Nozawa, a finance professor at the University of Toronto, puts it. A substantial share of the revenue the French state collects already goes to interest payments; each repricing enlarges a bill that must be financed by issuing more bonds at the new yields. France is heading into an election period, and Nozawa's concern runs forward: if populist leaders are elected, the deficit problem is expected to get worse.

The repricing no longer stays in Paris. The US ten-year Treasury sits near five percent, down from a recent peak of 5.3 percent but up from roughly four percent in March; Canada's ten-year is near 3.8 percent. Some French bonds are following the Treasury in lockstep, and economists are openly asking whether France is on the verge of another eurozone crisis.

The explainer ran in a Canadian outlet, written for borrowers asking what French bonds have to do with their own rates.