What France’s spiking bond yields, rising debt mean for Canadian borrowers

As France grapples with continued protests, high government debt, and growing speculation from economists about whether the country is on the verge of another euro zone crisis, Canadian investors and borrowers watching government bond yields rise worldwide are raising concerns.

“France’s government bond yields have risen more sharply than those of the United States and many other developed economies during the recent sell-off. The underperformance reflects growing concern about political uncertainty and a weak fiscal outlook,” said senior economist Vikram Rai at TD Bank in a statement on Wednesday.

“France stands out among its developed-market peers in the recent global bond sell-off. Long-term yields have risen across major markets, but French government bonds have seen an outsized move.”

Bonds are loan investment products issued by governments and companies over fixed terms, and over the course of that term, the bond pays a regular yield or interest payment to the owner. Bond yields fluctuate regularly based on a combination of various economic factors, as well as supply and demand.

Since the start of the year, especially since the Iran war began, bonds have been selling-off, which has driven up their yields in order to win back investors.

The U.S. Treasury yield has shot up over five per cent in recent months, and some French government bonds are following in lockstep.

France’s government, like many others around the world, has a debt problem.

The nation’s sovereign debt is now close to 120 per cent of its GDP, which means a substantial amount of revenue the government brings in, including from taxes, goes just to paying the interest on the money it’s had to borrow. Those rising interest costs are putting pressure on the government’s public finances.

If investors are losing confidence in a government’s ability to pay off its debt, they may sell their bonds because of perceived risk.

Another potential concern for investors, in this context, is the fact that France is about to go into an election period, which dials up the uncertainty about the country’s future financial strategies.

“The French government debt is like 120 per cent of GDP, and that is twice as high as what it’s supposed to be by the EU standard, and I think investors are more concerned about the future prospect,” says finance professor Yoshio Nozawa at the University of Toronto.

“If the populist leaders are elected, the deficit problem is expected to be even worse. So, this combined effect is contributing to the concern about the French government’s ability and willingness to narrow the gap between what they are spending and how much they are raising in tax revenue.”

Rai notes how the 10-year French government bond, known as the Obligation assimilable du Trésor (or OAT), is hovering at close to five per cent, which is the highest level since 2002, and up from about 3.5 per cent in June.

The 10-year U.S. treasury yield was about five per cent as of publication, and although that’s down from a recent peak of 5.3 per cent, it’s still up from roughly four per cent in March.