French government bond yields jumped on Wednesday as investors priced in mounting risk ahead of budget negotiations starting next week. Student protests that have rattled the country for three weeks paused for a day, while the government faces a divided parliament over a deficit it must cut. Asset managers at Pimco and Principal Asset Management warn the sell-off in French debt is not over.
Bond yields jump as budget talks near
The yield on France's benchmark 10-year OAT gained 16 basis points on Wednesday, rebounding sharply after a decline the day before. The 10-year OAT's yield has surged by more than 100 basis points since the start of the year.
Investors now await budget negotiations due to start next week, when the government must convince lawmakers in a divided National Assembly to back a fiscal adjustment worth tens of billions of euros. Since France's July 2024 snap election delivered no parliamentary majority, budget disputes have led to two administrations being ousted in no-confidence votes, and it took Prime Minister Sébastien Lecornu until February this year to pass the 2026 budget, by bypassing parliament through emergency legislation.
Student protests pause, politics stay tense
Student rallies that began over teacher shortages, long timetables and derelict schools have grown into a nationwide movement now in its third week, marked by clashes with police, school closures and thousands of arrests. Officials will use Wednesday's pause to open talks with high school students, and Lecornu is due to address the nation Wednesday evening. His government has accused the radical-left La France Insoumise of hijacking the movement; the party did not respond to a request for comment.
Further political change looms. Far-right candidate Marine Le Pen, the frontrunner for next spring's presidential election, pledged to cut France's deficit to 3% of GDP within 18 months of the election should she win, though critics question whether that is feasible. France's budget deficit topped 5.1% of GDP last year.
Asset managers flag more pain ahead
Pimco CEO Emmanuel Roman told Le Monde that France's bond market situation is critical. According to Le Monde: "the situation is critical" in French debt, Roman said, adding the country needs reforms like those Italy carried out when its back was against the wall.
Anthony Brinkman, a high-yield portfolio manager at Principal Asset Management, told CNBC the OAT sell-off does not look exhausted and the curve has not found its clearing price, with Moody's and S&P reviews due in Q4 that could trigger further selling if ratings are downgraded. Bank of France Governor Emmanuel Moulin, who sits on the ECB's Governing Council, said conditions are not met for an ECB intervention, since the central bank exists to fight inflation rather than national fiscal problems.
Source: CNBC
Trading involves risk.
Risk Disclaimer
