France's bond and stock markets saw heavy selling on Monday after violent protests over the weekend. The unrest included looting and clashes with police, leading to nearly 2,400 arrests and damage to public property in several cities. The yield on France's 10-year government bonds rose by eight basis points to 4.86%. Meanwhile, the two-year yield increased by five basis points to 3.6%. The yield gap between French and German bonds widened to 145 basis points, the highest in two years. This reflects growing risk perceptions among investors.
Economic Context
The protests were driven by rising living costs and worsening public services, with thousands of demonstrators involved. French President Emmanuel Macron condemned the violence, saying, "Looking at these images, we all asked ourselves: what is going through their minds?" Analysts noted that the unrest complicates the government's efforts to manage its finances. The government is struggling to pass a budget for the upcoming year. The projected public deficit is expected to widen to 5.4% of GDP in 2026, up from 5.1% in 2025. This raises concerns about France's credit rating ahead of a review by Moody's.
Broader Market Implications
The turmoil in France also impacted markets in neighboring Italy. The yield on the 10-year bond rose by 5.7 basis points to 4.53%. Investors worry that rising yields in France could affect other heavily indebted eurozone countries. Market analysts from Deutsche Bank and Capital Economics pointed out that the protests could deter international investment in French bonds. This could further strain the country's finances.
The rising yields on French government bonds could pressure the euro. The euro fell nearly 0.4% against the dollar to $1.1201. Investors are likely to react to the ongoing unrest and the possibility of a credit rating downgrade. This would increase concerns over France's fiscal health. Watch for the upcoming Moody's credit rating review on Friday, which may further influence market sentiment.
Related coverage: Protests Erupt Across Europe Over Cost of Living Crisis.
Based on reporting by: theguardian.com