Eurozone debt jitters creeping into French bonds

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The European debt crisis has gone from bad to worse as Italian government bond yields have soared, threatening the solvency of the Eurozone’s third-largest economy.

But things could go from worse to worst if bond yields keep rising in France, the continent’s No. 2 economy after Germany.


The market yield on 10-year French bonds jumped to 3.20% on Wednesday from 3.10% on Tuesday. The yield is below the recent high of 3.32% reached on Oct. 24. But what’s troubling about Wednesday’s jump is that it occurred even as German bond yields fell.

Normally, German and French bond yields rise or fall in tandem, reflecting the countries’ sort of joined-at-the hip status as the core economies of Europe.

But as global markets tumbled Wednesday, investors rushed to buy German bonds as a haven, while dumping French debt.

The yield on German 10-year bonds fell to 1.72% from 1.80% on Tuesday. The German yield is nearing the recent low of 1.67% reached on Sept. 22.

The French 10-year yield, by contrast, has jumped from 2.52% on Sept. 22. At 3.20%, it’s still far below the 7.25% yield on Italian 10-year debt. But it’s the trend that’s worrisome.

The French government knows it can’t afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its coveted AAA credit rating.

Moody’s Investors Service warned last month that it might put a negative outlook on France’s top-rung rating if Paris made too many commitments to back up its banks or other Eurozone states with tax dollars.

But France’s need to protect itself also raises doubts about its ability to extend help to Italy as Rome’s debt nightmare worsens.


Markets fear new threat to Eurozone

How Italian bond yields have rocketed

Italy’s embattled prime minister agrees to depart

-- Tom Petruno