France's 10-year yield touches 4.99%, the highest since 2002, and now pays about 76 basis points more than Spain
The gap over German Bunds hit 152 basis points, the widest since 2011, and default insurance rose to 81 basis points. The euro barely moved, which says this is a French credit problem, not a euro-zone one.
France's government borrowing costs hit a new high for this century on Friday. The 10-year French bond, the OAT, touched 4.99% in early trading, the highest since 2002, and its premium over equivalent German debt widened to 152 basis points, the most since the euro-zone debt crisis in 2011, Fortune reported. France's five-year credit default swap, the price of insurance against a default, rose to 81 basis points.
Yields eased later. CNBC's market data showed the 10-year at 4.87% late in the European day, against an intraday high of 4.994% and a 52-week low of 3.22%. Bloomberg ran several stories on the move, reporting that hedge funds unwinding crowded trades added to the selling.
The comparison that matters: Spain, not Germany
The OAT-Bund spread is the measure everyone quotes. The more telling number is where France now sits against the countries that were the problem in 2011. Using CNBC's late quotes:
| 10-year government bond | Yield | France pays |
|---|---|---|
| Germany | 3.46% | about 141 bp more |
| Spain | 4.11% | about 76 bp more |
| Italy | 4.61% | about 26 bp more |
| France | 4.87% | |
| UK | 5.39% | about 52 bp less |
| US | 5.28% | about 41 bp less |
When we covered the global bond rout on October 1, France was paying about 0.22 point more than Italy. On Friday's late quotes the gap was about 0.26. Markets now charge Paris three-quarters of a point more than Madrid for 10-year money, which is a judgment about France specifically rather than about southern Europe or the euro.
Why investors are pricing France on its own
Thierry Wizman, global FX and rates strategist at Macquarie, wrote that French CDS is now the highest among the major EU countries and the UK, and that the CDS move signals the spread widening reflects "higher sovereign default risk in France." He called it a "guilty" verdict on the direction of France's presidential politics, noting that neither the populist left nor the populist right is campaigning on deficit cuts.
The fiscal numbers Fortune cited: a deficit of about 5.4% of GDP, debt expected to rise to 122% of GDP next year from 119%, growth projected at 0.5% this year, and more than $380 billion of medium- and long-term bonds planned for next year. Scope Ratings cut France to A+ from AA- last month, matching Fitch and S&P. Wizman put the odds of a National Rally-led presidency at near 50% and described an outright default as low-probability.
What did not move
The euro. EUR/USD traded around $1.125 on Friday afternoon, up slightly on the day, per CNBC. A widening confined to one country, with Spanish and German yields barely changed on the day and the currency steady, is a narrower problem than a run on the euro area. It is the kind of country-specific move the European Central Bank's bond-buying backstop was built for, although that tool has eligibility conditions tied to EU fiscal rules.
For US traders, the practical read is that this is not where Treasury pressure is coming from: the US 10-year still yields more than France. For US companies with euro revenue, it has so far been a bond story without a currency cost.
What to watch: whether the 5% line breaks on the OAT, French CDS above Friday's 81 basis points, and any sign that Italian or Spanish spreads start to follow. So far, they have not.
Sources: Fortune (Macquarie note, CDS and spread figures); CNBC market data for government bond yields and EUR/USD, quoted around 2:55 p.m. ET; Bloomberg. Spreads are our arithmetic. This is market information, not investment advice.
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