France's 30-year government bond yields hit 16-year highs on fiscal concerns

By Stefano Rebaudo

Sept 2 (Reuters) - France’s 30-year government bond yields hit their highest levels in over 16 years on Tuesday, driven by fiscal concerns, as Prime Minister François Bayrou began talks with political parties in a bid to prevent a government collapse.

France’s far-right National Rally said on Monday it was preparing for snap elections, anticipating that opposition parties will bring down the minority government in a vote scheduled for September 8.

French debt could rise further, with economists at ING noting the government’s target to lower the debt-to-GDP ratio to 117.6% by 2026 and 117.2% by 2029 compared to projected levels of 118.3% and 125.3% without fiscal reforms.

France’s 30-year government bond yield FR30YT=RR hit 4.513%, its highest since June 2009, and was last up 5 basis points (bps) at 4.50%.

The yield gap between safe-haven German Bunds and 10-year French government bonds DE10FR10=RR — a market gauge of the risk premium investors demand to hold French debt — widened to 80 bps after rising up to 82 bps last week.

"European politics have come back into focus, with growing anxiety surrounding a standoff over efforts to curb government borrowing in France along with moves by European leaders to underpin Ukraine's security following any peace deal," said Mark Haefele, chief investment officer at UBS GWM.

Ultra long-dated government bonds have come under selling pressure as markets expect Germany’s investment plans, along with likely increases in defence spending across euro area countries, to push up debt levels.

The German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 3 bps to 2.78%. Yields on 30-year German bonds DE30YT=RR hit a fresh 14-year high at 3.413%.

Spain’s 30-year yields ES30YT=RR were up 4.5 bps at 4.29%, after reaching 4.297%, its highest since November 2023.

Italy’s 30-year yields IT30YT=RR rose to their highest since April at 4.661%.

Euro zone inflation edged up a touch in August, staying close to the European Central Bank's 2% target and likely firming up market bets that interest rates will remain unchanged in the near term.

The ECB should keep interest rates steady as the euro zone economy is holding its own in the face of U.S. tariffs and inflation may still come in higher than expected, ECB policymaker Isabel Schnabel told Reuters.

“The direction of inflation from here is still a live debate at the Governing Council, as also highlighted by the more hawkish comments from Isabel Schnabel this morning,” said Michiel Tukker, rate strategist at ING.

“The ECB will have a bias towards more easing,” he added, after arguing that data are still showing close to zero growth.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, rose 1.5 bps to 1.97%.

Markets priced in around a 70% chance of an ECB rate cut of 25 bps in June 2026 EURESTECBM7X8=ICAP but also a depo rate at 1.905% from the current 2% at the end 2026. EURESTECBM11X12=ICAP