French Bond Spread Over Germany Hits 152 Basis Points, Highest Since 2011

France's 10-year government bond yield spread over Germany widened to 152 basis points on October 2, reaching a level not seen since 2011 and approaching territory last associated with the eurozone debt crisis. The French 2-year yield also surged, rising as much as 13.8 basis points on the day to 3.8337%, reflecting broad-based selling of French sovereign debt. The contagion spread beyond France, with Italy's 2-year spread over Germany nearly doubling to 55 basis points in the biggest single-day jump since 2020.

The selloff is driven by deepening fiscal and political uncertainty in France. Candriam CIO Nicolas Forest warned that the French deficit could approach 6% of GDP, placing French debt close to European debt-crisis territory. Forest also cautioned that investors may not be able to rely on the ECB to contain the rout. RBC BlueBay's Mike Bell said the spread could reach 200 basis points in the coming months if fiscal and political conditions do not improve.

Potential sovereign ratings downgrades expected in October could add further pressure to French bonds. The widening French-German gap is also weighing on the euro, which faces headwinds from the growing yield differential between U.S. Treasuries and European government bonds.