French-German spread hits highest since 2011! Street protests combined with debt anxiety prompt investors to flee faster

As a broad risk-off sentiment sweeps global markets, capital is flooding into German and US government bonds for shelter, further intensifying pressure on French bonds. The premium on French 10-year government bonds relative to German bunds widened by 15 basis points to 174 basis points, the highest level since 2011. Italian bonds are also under pressure, with their yield spread over German bunds widening by 11 basis points to 127 basis points. France has been at the epicenter of bond market anxiety this month, with concerns that lawmakers will struggle to address the country's heavy debt burden as protesters clash with police over the cost of living. Paris police banned demonstrations in parts of the city on Thursday, citing the risk of violence. Although French spreads have now risen to levels similar to those during the euro debt crisis, there remain several key differences from that period. First, many investors believe the current market moves have not yet descended into disorderly turmoil and do not meet the conditions for emergency rescue measures. Former European Central Bank President Mario Draghi recently expressed a similar view, saying policymakers are unlikely to intervene in the near term. Craig Veysey, portfolio manager at Guinness Global Investors, said Europe now has stronger backstop mechanisms than in 2011, and France has not experienced the banking sector stress that swept countries such as Greece back then. Nevertheless, Veysey maintains a bearish view on European bond markets, believing there is still room for yields to rise substantially. In his view, even German bonds risk being caught up in a broader European selloff, especially if the market begins to expect that Germany will need to assist more heavily indebted countries. "Germany may in the future have to subsidize other governments and may itself need to issue more debt as a result I think this concern is starting to build among investors," he said. "The market may believe this will become reality at some point." Veysey, who headed fixed income at Sanlam Investments during the euro debt crisis, has reduced exposure to Italian and German bonds and increased holdings of UK gilts and US Treasuries. On Thursday, concerns about artificial intelligence (AI) investment and rising oil prices triggered a broad global risk-off move. The yield on French 10-year government bonds jumped 12 basis points to 5.13%, the highest level since 2002. Allspring Global Investments sees few obvious triggers that could restore market confidence at present. "Current yield levels are worth watching 5% clearly draws attention," Henrietta Pacquement, chief operating officer of fixed income at Allspring, said in an interview. "But we still face the hurdle of next year's election, and there are still several months to go before that."