French government bond yields climbed to 5% for the first time since 2002 on Wednesday, as growing political uncertainty, widespread protests and concerns over the country's public finances rattled financial markets.
The yield on France's 10-year government bonds touched 5.002% at 9:14 a.m. GMT before easing slightly below the threshold, Reuters reported. The yield was last up around 8 basis points on the day, extending a sell-off that has pushed French borrowing costs higher than those of many other developed economies.
Paris-listed stocks also tumbled amid mounting concerns over the country's political stability and fiscal outlook. The latest spike in yields comes after days of unrest and political recriminations across France.
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Protests initially centred on the cost of living and education have escalated into widespread rioting and looting, adding to uncertainty for investors already worried about the government's ability to rein in public spending.
France's borrowing costs have risen sharply from around 3.2% in late February, according to the Financial Times, as the Iran war has driven up energy prices and fuelled inflation concerns. Expectations of further interest-rate increases have added to pressure on government bond markets globally.
However, France has been among the hardest-hit economies in the Group of Seven, reflecting its high public debt, persistent budget deficit and increasingly uncertain political outlook.
The widening gap between French and German government bond yields highlights the growing risk premium investors are demanding to hold French debt.
The spread between the two countries' 10-year borrowing costs approached 157 basis points, or around 1.57 percentage points, on Wednesday. The Financial Times reported that the gap had moved close to 1.6 percentage points, matching levels seen during volatile trading earlier this month.
The spread measures the additional return investors demand to lend to France rather than Germany, which is generally considered a safer borrower in the eurozone.
French bonds have come under pressure as the weakened government struggles to secure a budget through parliament and address the country's sizeable fiscal deficit.
Jeff Mueller, co-head of fixed income at Morgan Stanley Investment Management, told the Financial Times that political willingness to pursue fiscal consolidation ahead of the election was very low, leaving room for further deterioration.
John Stopford, head of multi-asset income at Ninety One, also pointed to the adverse political environment, warning that the spread could widen further as the presidential election approaches in April.
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Investors are also watching Moody's upcoming rating decision on France, scheduled for Friday. A downgrade is a possibility, with the country's Aa3 rating already carrying a negative outlook.
A lower rating could further increase borrowing costs by prompting investors to demand higher returns for holding French government debt.
With political uncertainty, elevated energy prices and fiscal pressures converging, France faces mounting challenges in restoring investor confidence. The bond-market sell-off underscores how the combination of political instability and weak public finances can quickly translate into higher borrowing costs and broader market volatility.
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