French government bond borrowing costs climbed above U.S. Treasury rates on Thursday for the first time since 2013, driven by investor anxiety around France’s ongoing budget difficulties and recent nationwide protests.
The yield on France’s 10-year bond, known as the obligation assimilables du Trésor (OAT), rose to 5.089% in early trading, marking the highest level since July 2022 and breaking the 5% threshold—the highest in over two decades. This increase also widened the risk premium between French and German 10-year bonds to its largest gap in nearly 15 years.
Market Reaction to Budget Gridlock and Social Unrest
The surge in French borrowing costs has been linked to the government’s struggle to pass next year’s federal budget amid political deadlock. President Emmanuel Macron’s proposed reforms, including raising the pension age from 62 to 64, have faced resistance in parliament. This impasse occurs alongside widespread public protests demanding more government investment in education and infrastructure, which at times turned violent. Police reported nearly 2,400 arrests after clashes in major cities such as Paris and Marseille, where public buildings were damaged and businesses looted.
Wider Impact on European Debt Markets
Deutsche Bank strategist Jim Reid noted the selling pressure on French debt is spreading to other European countries. Italian and Spanish government bond spreads over German equivalents have widened to levels not seen since mid-2025, reflecting growing concerns across the eurozone’s more indebted nations.
Implications for European Central Bank Policy
Carsten Brzeski of ING highlighted that rising yields reinforce the European Central Bank’s current restrictive monetary stance ahead of its upcoming interest rate decision. After its last hike to 2.5% in September, the ECB is expected to hold rates steady next week and possibly delay further increases until December. Without a resolution to France’s fiscal challenges, bond markets themselves may constrain the ECB’s ability to raise rates further.
France’s budget deficit remains at 5.1% of gross domestic product for 2025, while public debt stands at 115.6% of GDP. The combination of fiscal strain, political stalemate, and inflationary pressures tied to geopolitical tensions, such as the war in Iran, continue to fuel volatility in the region’s debt markets.
