France’s 10-year bond yield heads for biggest quarterly surge since 1987

France's 10-year bond yield is poised for its largest quarterly surge in nearly four decades, marking the most significant monthly increase in almost four years, as reported by Reuters. This surge underscores the magnitude of this month's global debt-market sell-off. While Eurozone yields retreated from recent peaks on Wednesday due to heightened caution about potential aggressive central bank rate hikes, inflation data from France, Germany, and Italy dampened the decline.

Bond yields have skyrocketed this month as prices fell and energy costs surged, causing inflation concerns. Meanwhile, the boom in artificial intelligence has bolstered economic growth, prompting investors to anticipate prolonged elevated interest rates.

France faces added pressure from its substantial fiscal deficit and political dynamics leading up to next year's presidential election, which may complicate efforts to reduce the deficit. The yield on France's benchmark 10-year OAT reached a 18-year high at 4.8485%, a 2 basis point increase from the previous day. Over the past month, the yield has surged 66.5 basis points, its largest monthly jump since late 2022.

Since July, it has risen 119 basis points, putting it on track for its most significant quarterly gain since 1987. Higher borrowing costs are starting to burden France's fiscal situation, with the government planning to issue a record €340 billion in bonds next year. Interest expenses are now forecast to increase by €5 billion in 2026 and €7 billion in 2027 compared to previous estimates.

The gap between French and German 10-year borrowing costs expanded to 125.90 basis points, the highest level since June 2012. De Montpellier, a senior economist at ING, noted that higher interest rates are becoming a source of fiscal deterioration, complicating efforts to stabilize public debt. Meanwhile, the spread between Italian and German 10-year yields widened to 102.11 basis points, its highest since March 23, further highlighting the divergent paths of the two economies.

Inflation has limited bond-market optimism, with Germany's 10-year yield falling by 4 basis points to 3.57%, its lowest since 2009. ECB policymaker Peter Kazimir suggested that the ECB could remain flexible as it has raised rates twice this year, echoing similar comments from ECB President Christine Lagarde. European two-year yields, more sensitive to ECB policy expectations, fell more sharply than longer-dated yields, with Germany's two-year yield dropping nearly 9 basis points to 3.19%.

However, European inflation data indicated that ECB pressure may persist. In France and Germany, inflation accelerated sharply in September, with France's harmonised inflation rate rising to 3.4% from 2.6% in August and Italy's increasing to 4.1% from 3.2%.