The cost of debt in France reaches 5% for the first time since 2002

The cost of France's debt has reached 5% for the first time since 2002, as investor concerns over the country's political stability and public finances have driven up the yield on 10-year bonds to a record level. The cost of long-term debt, measured by the 10-year bond yield, rose to 5% on Wednesday, up 0.08 percentage points from the previous day, surpassing the 5% threshold.

This marks an increase of over 0.2 percentage points for the week, driven by a wave of massive sales in the bonds of G7 countries. The situation is exacerbated by global tensions, such as the war in Iran, which have fueled inflation and put additional pressure on economies with high debt levels and large budget deficits. Jeff Mueller, co-head of fixed income at Morgan Stanley Investment Management, noted that the political will to implement any fiscal consolidation before the elections is very, very low, and there is ample room for the situation to deteriorate further.

The spread between France's 10-year bond yield and Germany's has narrowed to 1.6 percentage points, matching the highest intraday level seen during a volatile period earlier this month. These figures have not been recorded since the eurozone debt crisis over a decade ago. Political instability makes it difficult to imagine an improvement in the short term, according to John Stopford, head of multi-asset investments at asset manager Ninety One.

The most likely path forward would be an expansion of France's yield differential heading into the April presidential elections, although the European Central Bank is unlikely to intervene unless there is significant deterioration in current conditions. Moody's will publish its decision on France's credit rating on Friday, and a downgrade is not out of the question given the negative outlook for the current rating of Aa3.