France's 10-year government bonds are suffering their worst decade for nominal returns in 223 years, as a widening budget deficit drives borrowing costs to multidecade highs. The strain has spread into European stocks and the euro, while a Reuters poll now points to another European Central Bank rate hike in December.
France's 10-year OATs have posted their worst decade for nominal returns in 223 years, according to Deutsche Bank strategists Jim Reid and Henry Allen — a stretch long enough to include the Reign of Terror years of 1793-1794 in its rolling calculation.
Deficit pushes yields to multidecade highs
A widening budget deficit has pushed borrowing costs to multidecade highs, with market observers tying the move to broader pressure on global bond markets, including in the US. The spread between French and German 10-year yields has widened to about 1.4 percentage points, reaching toward a level last seen in 2012. Reid and Allen found the gap widened to its largest since German reunification in 1990 during last week's turmoil alone.
The deficit is set to reach 5.4% of gross domestic product this year, above the European Union's 3% limit, and France has not balanced its budget since 1974. Its debt has climbed to €3.5 trillion, or $3.92 trillion — roughly level with Germany's during the 2008 financial crisis but now far above it. According to MarketWatch, market strategist Dhaval Joshi said: "there's no easy way out" given how stretched both government and corporate debt have become.
Stocks and the euro feel the strain
France's CAC 40 has underperformed every major European index since the start of 2024, up just 4% against gains of more than 30% for the STOXX 600 and over 50% for Germany's DAX. The pan-European STOXX 600 fell as much as 1% to its lowest level since June on Thursday, while the CAC-40 sat 12% below its August record high.
The euro traded near a 17-month low at $1.1185, after losing 0.6% on Wednesday, with a break below $1.1161 risking a retreat toward $1.1065.
Bank of France head Emmanuel Moulin acknowledged the country's economic situation was serious but said it did not require help from the European Central Bank.
ECB poll points to a December hike
A Reuters poll found the ECB is expected to hold its deposit rate at 2.50% this month but raise it by 25 basis points in December as inflation runs nearly double its 2% target. Inflation reached 3.8% in September, close to the ECB's worst-case scenario. Sixty-four of seventy-three economists polled now see a December increase, a reversal from last month's survey, when more than 90% expected rates to stay on hold.
Sources: MarketWatch, Reuters via Investing.com, Reuters via Investing.com
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