French bond yields hit a new multidecade high
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French borrowing costs are heading unrelentingly upward, making for a slow-moving fiscal debacle in Europe's second-largest economy.
Why it matters: It shows the risks for other advanced countries, including the U.S., as they face the combined pressure of large deficits, political resistance to austerity and a wary bond market.
Driving the news: The benchmark 10-year French government bond yielded 5.01% as of 11:35am ET — a new post-2002 high.
- Also Wednesday morning, the spread between French yields and comparable German bunds widened to about 1.6 percentage point, the biggest spread in 15 years, per Bloomberg.
- Given that the two countries share a currency, central bank and a deeply intertwined economy, it is a sign of bond market revolt against French fiscal policy and worry about its political future.
State of play: Riots and looting over the weekend were the latest evidence that any effort to restrain French fiscal deficits could come with extreme political blowback.
- The events enhanced the market-priced odds of the right-wing National Rally party prevailing in next spring's elections. The party has promised a slew of populist, deficit-busting policies like lowering energy taxes and reversing pension reforms.
- Traders on Polymarket now put the odds at nearly a coin flip on whether the National Rally's leader, Marine Le Pen, will be the next president of France: 46% as of Wednesday morning, up from 5.5% as recently as June.
The bottom line: Political risk is back in the eurozone, with France on the front lines.
