The cost of insuring French government debt against default jumped Monday to its highest level since March 2020, pressuring the euro area's bond markets even as easing Gulf energy risk offered brief relief. French 10-year yields pushed higher again on Tuesday while Germany's benchmark curve steadied, keeping the spotlight on Paris's fiscal trajectory ahead of remarks from European Central Bank President Christine Lagarde.
French default insurance hits pandemic-era highs
Trading desks across Europe are repricing French sovereign risk after the cost of insuring French government debt against default jumped on Monday to its highest level since the peak of the pandemic panic in March 2020. The move reflects deepening alarm over Paris's structural deficit trajectory and persistent parliamentary gridlock.
Official projections show France's debt load reaching a record 119.3% of economic output in 2026, with the ratio expected to expand to 121.7% in 2027. French 10-year OAT bonds stand as the worst-performing sovereign paper among major developed economies this year, with yields surging more than 90 basis points year-to-date, far outstripping moves in German Bunds or U.S. Treasuries.
Yields diverge as Paris loses its core status
Investors have demanded a higher risk premium for holding French duration paper amid fiscal slippage, downgraded credit ratings, and lingering political uncertainty following fractured legislative elections. As a result, French OATs have lost their traditional status as a core euro-area asset, with yields pushed closer to peripheral peers.
On the session, the benchmark French 10-year OAT yield rose to 4.502%, bouncing off a one-week low as duration sellers pushed spreads wider against German benchmarks. Germany's two-year Schatz yield held around 3.229%, largely flat, while the 10-year Bund yield ticked up to 3.479% as broader risk assets staged a tentative recovery. France's CAC 40 was flat on the day and virtually unchanged year-to-date, while the STOXX 600 was up nearly 7% for the year.
Energy relief offsets some pressure
Broader European rate curves drew temporary support from easing energy markets. Brent crude futures extended their pullback after reports that maritime shippers are using alternative pipeline and ship-to-ship routes out of the Persian Gulf, alongside comments from U.S. President Donald Trump indicating openness to direct talks with Iranian President Masoud Pezeshkian at the UN General Assembly.
Despite that relief, fixed-income allocators stayed cautious as senior ECB officials prepared for public appearances later in the day. With Lagarde scheduled to speak, traders are parsing whether Frankfurt views the recent rate hike to 2.50% as sufficient to anchor medium-term inflation expectations, or whether persistent fiscal deficits in core member states could complicate the tightening path heading into 2027.
Source: Investing.com
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