France’s bonds drop as rioting heaps pressure on government

French government bonds dropped after a weekend of violent unrest, underlining the tension between protesters upset over the cost of living and a government that can’t pay to keep the peace.

The nation’s debt underperformed its European peers, sending the spread between the French 10-year yield and its German equivalent wider by as much as eight basis points, to 146 basis points — the highest in two weeks. The gap to Italian yields reached a fresh record, while the euro weakened and the CAC 40 stocks index fell 1.5%.France was gripped over the weekend by a wave of attacks on public buildings, shops and restaurants and unions have called for a nationwide strike on Nov. 5. Yet a debt mountain and a budget deficit among the largest in the euro area mean the government cannot simply increase spending to appease the public.

“France today is confronting a social crisis, an immigration crisis, an energy crisis, an economic crisis and a fiscal crisis,” said Louis-Vincent Gave at Gavekal Research. “All this at a time when the French president is in office, but not in power. Nothing that occurred this weekend seems to point the way toward a higher euro, or lower French bond yields.”

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Investors increasingly see French government bonds as riskier than those of Germany, which is generally treated as the euro area’s safest borrower. The French-German yield spread is approaching 150 basis points, pushing further into territory associated with the euro-area debt crisis. During the most extreme periods of the recent selloff in French debt, the spread neared 160 basis points.

The protests come as French politicians debate the proposed budget for 2027. The bill, set out by the government, features €43 billion ($48.2 billion) in measures to bring down the deficit. Reaching a compromise appears difficult in a deeply divided parliament, and could prove even harder with a presidential election six months away.

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What Bloomberg Strategists Say…

“France’s credit-default swap curve is likely to flatten in the coming months as traders demand a bigger premium to underwrite idiosyncratic political risk ahead of the April presidential elections.”

— Ven Ram, cross-asset strategist.

The euro fell as much as 0.5% to $1.1183, lagging Group-of-10 peers. Traders have been bearish on the outlook for the currency despite a brief rebound last week. The cost of hedging against further euro losses surged.

“While the violent protests are not representative of the vast majority of the people, the developments over the weekend nevertheless underscore the delicate balancing act the government is facing between appeasing the people and the markets,” said Commerzbank AG strategist Erik Liem.

Moody’s review of France’s sovereign rating on Friday will provide another signpost for the country’s fiscal health, with a downgrade seen as the more likely next move given its negative outlook. Moody’s currently ranks France one notch higher than Fitch Ratings and S&P Global Ratings.

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