The yield spread between French and German 10-year government bonds is spiking as France’s government once again comes under pressure.
While President Emmanuel Macron’s position appears to be secure, the three-party coalition in parliament has failed to hold, which poses a risk to the French economy through higher yields.
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This is part of a broader set of fiscal challenges facing the G-7 economies that threaten to pull long-term interest rates in each of the economies higher.
Whether that trigger is government securities like Japanese JGBs, French OATs, UK gilts or American Treasuries, higher rates is one of the major global macroeconomic risks heading into the end of the year.
In the recent past, French OATs have tended to spike relative to German bunds, beginning with the European debt crisis in 2011 and the pricing of additional risk of holding increasingly vulnerable French securities.
Also at work is the de-industrialization of Germany’s economy, which especially since the China shock has worked to suppress German yields and push its economic growth to near zero.
Growth that low indicates an economy unable to support normal levels of interest rates, which is helping to widen the spread between French and German notes.
