A measure of French debt risk rose on Wednesday to the highest level in over a decade as a political standoff over the country’s budget for the next year threatens to bring down the recently formed government.
The premium that the investors demand to hold French debt rose to its highest level since 2012 in a sign of concerns over the country's finances, while benchmark German yields fell along with those in the United States.
The spread between French and German 10-year bond yields rose to 90 basis points (bps), the highest since the eurozone crisis 12 years ago, before easing to around 86 bps.
French far-right leader Marine Le Pen has been threatening to bring down France's coalition government in a no-confidence vote over proposed tax rises and spending cuts in the 2025 budget.
Prime Minister Michel Barnier told French broadcaster TF1 on Tuesday there could be "serious turbulence on the financial markets" if the government collapses.
France's 10-year bond yield was flat at 3.021% by 11:45 a.m. GMT, while Germany's was around 4 bps lower at 2.162%. Yields rise as prices fall and vice versa.
"Investors remain concerned about political developments in France, especially due to the government's difficulties in approving next year’s budget," said analysts at Italian bank UniCredit in a note on Wednesday.
Outside of France, eurozone bond yields fell along with those in the United States.
European yields were likely being pulled down by "very disappointing consumer confidence data from Germany and France, on top of the recent weak growth indicators," said Jussi Hiljanen, head of European rates strategy at SEB.
Data on Wednesday showed German consumer sentiment tumbled more than expected going into December, while a French measure also dropped.
A key gauge of the market's long-term eurozone inflation expectations fell below 2% for the first time since July 2022 on Tuesday, a sign investors think faltering growth means inflation could undershoot the target of the European Central Bank (ECB) in the coming years.
The 10-year U.S. Treasury yield, which sets the tone for borrowing costs around the world, was down 3 bps at 4.271%.
"We rallied in the morning following a bit of rally in Treasuries post our close and also concerns over France," said Mohit Kumar, chief financial economist for Europe at Jefferies. "But then Schnabel talked about gradual cuts and we have come back."
Influential ECB board member Isabel Schnabel told Bloomberg that the central bank should cut interest rates only gradually.
Short-dated German yields ticked up from two-year lows after Schnabel's comments and were last down 2 bps at 2.019%.
Italy's 10-year bond yield was down 3 bps at 3.432%.
Inflation data on Friday is expected to show eurozone price growth picked up to 2.3% year-over-year in November, from 2% in October and 1.7% in September.
Before that, data on U.S. personal consumption expenditure, the preferred price gauge of the Federal Reserve (Fed) is due at 3 p.m. GMT.
