French bond yields near 24-year high as new protests loom

French Bond Yields Surge to 24-Year High Amid Political Unrest and Market Caution

Market Reactions and Political Developments Impacting French and Euro Zone Bonds

By Stefano Rebaudo

French Bond Yields Climb on Political Unrest

Oct 20 (Reuters) - France's government bond yields climbed further on Tuesday after their biggest daily rise in nearly a month, with investors remaining cautious as protest groups announced a new round of demonstrations planned for Saturday. 

French bond prices, which move inversely to yields, slid on Monday after weekend protests led to riots across France, adding to the difficulties the government faces in reducing its large deficit.

Yield Movements and Spreads

France's OAT yields were up 3 basis points (bps) at 4.96%; it reached 4.9937%, its highest since July 2002, in early October. The yield gap between OATs and Bunds widened by 5.5 bps to 152.50 bps. It reached 158.67 basis points in early October, the highest level since November 2011.

The Italian spread also rose 4.5 bps to 113.51 bps. 

Political Landscape and Fiscal Concerns

Budget Bill Vote and Political Uncertainty

“While not pivotal to the overall process, today’s vote on the revenue side of the (French) budget bill takes on a little more importance as a near-term signal,” Jamie Searle, European rate strategist at Citi, said.

Impact of Far-Right and Far-Left Candidates

French far-right leader Marine Le Pen and hard-left rival Jean-Luc Melenchon extended their lead over other candidates in a poll published last week — before the weekend's events, a scenario analysts view as the least favourable for efforts to reduce France's fiscal deficit.

"The protests highlight that any government will struggle to implement the required reforms and savings against broader public resistance," Benjamin Schroeder, senior rates strategist at ING, said.

"The beneficiaries (of the protests' political fallout) appear to be the right and centre candidates, while on the far left, Melenchon’s chances of winning the presidential race have been pared back," he added, arguing that Melenchon’s plans are viewed as among the most controversial.

Euro Zone Bond Market Trends

Bund Yields and Energy Price Pressures

Meanwhile, euro zone benchmark Bund yields edged lower but traded within their recent range after last week’s drop, as persistent energy price pressures kept investors from scaling back bets on further European Central Bank rate hikes.

Oil prices advanced on Tuesday, with Brent hovering around a five-month high. 

Outlook for Rate Hikes and Energy Prices

Analysts said it will be difficult to materially reduce the market's bias towards further rate hikes, as a credible decline in energy prices remains elusive and winter weather is likely to play a crucial role in determining the path of gas prices.

German Government Bond Yields

Germany’s 10-year government bond yields, the euro zone benchmark, were down 2 bps to 3.43%. They have moved between about 3.40% and 3.50% since early this month, barring last Thursday’s drop, when tech stocks took a beating. 

Germany's 2-year government bond yield, more sensitive to policy rate expectations, fell 1.5 bps to 3.07%.

(reporting by Stefano Rebaudo; editing by Hugh Lawson)