Record-Wide Yield Spread Between French and German Bonds Amid Economic Concerns

The yield spread between French and German 10-year bonds reached its widest in seven weeks, with the European Central Bank expected to cut rates in October. French bonds lagged due to political uncertainties, and concerns over France's budget deficit have prompted fears of further widening. Economists forecast more challenges ahead.

The spread between French and German 10-year bonds hit its widest in seven weeks on Thursday, driven by expectations of an upcoming European Central Bank (ECB) rate cut and political uncertainties in France. Germany's 10-year bond yield dropped 2.6 basis points to 2.16%, while France's fell by 0.9 basis points to 2.97%.

This spread, which reflects the higher returns investors demand for holding French debt over safer German bonds, hit 82 basis points—its widest since August 5. It had been around 70 basis points two weeks prior, but eased slightly. Investors are now closely monitoring French yields, which rose above Spain's for the first time since 2008 due to concerns about France's budget deficit management.

French Prime Minister Michel Barnier faces a tight deadline to finalize the 2025 budget and present it to lawmakers by mid-October. Budget Minister Laurent Saint-Martin warned that the deficit might exceed 6% of economic output, surpassing the previous government's estimate of 5.1%. Economists at Capital Economics believe the French government will struggle to pass a deficit-reducing budget, predicting that the spread on French versus German government bond yields will continue to widen.

(With inputs from agencies.)