France’s 10-Year Bond Yield Tops 5% for First Time Since 2002 as Debt Worries Mount

France’s benchmark 10-year government bond yield rose above 5% on Wednesday for the first time since 2002, as investors grew more concerned about the country’s ability to repair its strained public finances.

The yield on the 10-year OAT touched 5.002% at 0914 GMT, according to Reuters, and was last up about 8 basis points on the day at just below 5%.

The premium investors demand to hold French bonds over benchmark German Bunds stood at about 157 basis points, near levels last seen in 2011, Reuters reported. Barron’s put the spread at a 15-year high of 160 basis points in early Wednesday trading.

Why investors are uneasy

The benchmark has climbed more than 170 basis points since late February, according to Barron’s. Rising inflation, worries about the debt and deficit profile, and next year’s presidential election are all weighing on the market.

Investors are focused on France’s debt, which is nearly 120% of gross domestic product, and on plans for a budget deficit likely to top 5.4% this year and 6.5% next year without changes to government spending, Barron’s reported.

Global bond yields have risen this year as surging energy prices prompted central banks to raise interest rates, Reuters noted. France’s borrowing costs have risen more than most of its peers, and crude oil rebounded back above $110 a barrel on Wednesday.

Unrest adds to the pressure

Widespread protests in France have deepened the worry. The unrest, which began as student demonstrations earlier this month, widened into anger over the cost of living and turned violent over the weekend. More protests are planned for Saturday.

Companies are feeling the impact: Carrefour, Europe’s largest food retailer, cut its targets for operating profit margin growth on Tuesday because of the riots.

“The government has almost no room to respond to the protests through additional spending or tax cuts,” Charlotte de Montpellier, ING’s senior economist for France and Switzerland, told Barron’s. “Yet without concessions, it may also struggle to restore calm.”

“Any attempt to ease the tensions through measures that further weaken the public finances could, in turn, increase investor concerns and push French borrowing costs higher,” she said. “All in all, France has neither the fiscal room to buy social peace nor the political room to impose adjustment easily.”

In the background, a weakened government in Paris is trying to push a budget through a fragmented parliament ahead of a closely contested presidential election next year, Reuters reported.

Reporting based on coverage by Reuters, Barron’s and The Times.