French-German bond spread hits crisis levels amid political uncertainty
The French-German 10-year bond yield spread surged past 150 basis points on Friday, hitting levels not seen since the 2011 euro debt crisis. This spike reflects growing concerns over France's ability to manage its budget deficit, which is projected to reach 6.5% without significant spending cuts. Political tensions are rising ahead of France's divisive presidential election in April, with far-right or far-left candidates potentially winning.
The euro weakened to near 18-month lows against the dollar on Monday, as markets reduced expectations for another European Central Bank (ECB) rate hike by year-end. Traders are closely monitoring other euro government debt spreads for signs of contagion. Meanwhile, Spanish Prime Minister Pedro Sanchez called a snap election over housing reform issues, adding to the political uncertainty in Europe.
Investors are seeking safety in German bunds or the Swiss franc, which surged against the dollar and euro late last week. French bank stocks have been under pressure, though broader European equities have held up, possibly aided by the weaker euro and reduced ECB rate hike expectations.
In the U.S., the September payrolls report showed a much smaller-than-expected rise of 29,000, cutting the chances of another Federal Reserve rate hike this month to around 20%. The G7's decision to release 100 million barrels of diesel and crude has helped stabilize energy prices, keeping a lid on Treasury yields.