French bond spread widens to 148 basis points as fiscal worries weigh on the euro

Concern about France's public finances pushed French government bond yields higher and weighed on the euro at the start of the week. The yield on France's 10-year government bond, known as the OAT, reached 4.94 percent, and its spread over the equivalent German Bund widened to 148 basis points, according to CaixaBank Research's daily markets report of October 20. French bonds underperformed as sovereign yields rose across Europe.

The pressure reached other markets. European equities weakened and the euro depreciated against both the US dollar and sterling, the report said, while US stocks advanced on gains in artificial intelligence and semiconductor shares.

The OAT-Bund spread measures the extra yield investors demand to hold French debt instead of German debt, which markets treat as the euro area benchmark. A wider spread raises France's borrowing costs and can signal broader stress in euro area bond markets, which tends to weigh on the single currency.

The French government is trying to restore confidence in its budget plans. On October 1, the finance minister said the target of reducing the budget deficit to 3 percent of GDP by 2029 remains possible, Newsquawk reported. The budget includes 43 billion euros of new measures, or 54 billion euros including existing measures, and the government plans to return to its consolidation path in 2027.

The moves come ahead of the European Central Bank's next decisions. Markets expect the ECB to keep rates unchanged at its October meeting and assign an 84 percent probability to a rate increase in December, according to CaixaBank Research. Higher policy rates would add to French financing costs while investors focus on the deficit.