French 10-year yields rise after budget, German Bund yields climb
Updates prices
By Medha Singh
Oct 11 (Reuters) -French bond yields edged higher onFriday as investors assessed the government's 2025 budget to tackle a spiralling fiscal deficit, while German bond yields hit a freshone-month high.
FrenchPrime Minister Michel Barnier's new government, under pressure from financial markets and France's European Union partners to take action,outlined plans for 60 billion euros ($66 billion) worth of spending cuts and tax hikes on thewealthy and onbig companies.
"The main points were well telegraphed through the media over the past weeks and should hence not take markets by surprise," said Michel Nies, economist at Citi.
"Much of the adjustment burden falls on revenue increases, which will not be easy to achieve in the magnitude that’s pencilled in."
France's 10-year bond yields FR10YT=RR, which move inversely to prices, were up 3 basis points (bps) at 3.058%, hitting a five-week high.
The spread between France's and Germany's 10-year government bond yields DE10FR10=RR stood at 77.5 bps, largely unchanged from a day earlier.
That spread, a gauge of the higher returns investors demand for holding French debt over the European benchmark, has been in focus since it widened sharply in the run-up to France's parliamentary election earlier in the year.
The government had previously said the budget bill would reduce the public deficit to 5% of gross domestic product (GDP) next year from 6.1% this year as a first step towards bringing the shortfall into line with an EU limit of 3% in 2029.
Goldman Sachs economists wrote in a note that the scale of the proposed consolidation and the corresponding reliance on tax increases left them less confident about the government's ability to meet its 2025 deficit target.
Fitch's review ofFrance's rating due later on Friday will be a focus of investors' attention, though markets see a bigger risk of a downgrade when Moody's updates its stance on Oct. 25.
All three major ratings agencies, which also include S&P Global, currently have a stable outlook in place, but this might become increasingly difficult to justify, Citi's Nies said.
Meanwhile, the euro zone benchmark German10-year bond yield DE10YT=RR gained 3 bps at 2.28%, after rising to 2.299%, its highest since early September.
In the absence of major domestic economic catalysts, signs of a strong U.S. economy and the prospect of U.S. rates remaining higher for longer have recently been driving euro zone yields, pushing them to multi-week highs.
U.S. Treasury yields ticked lower early on Friday after a report showed producer prices were flat in September.
The European Central Bank's Oct. 17 meeting is now expected to take centre stage, with money markets almost fully pricing in a 25 bps rate cut.
Germany's two-year bondyield DE2YT=RR, which is more sensitive to ECB rate expectations, was up 3 bps at 2.26%.
Elsewhere, Italy's 10-year government bond yield IT10YT=RR firmed 3 bps to 3.57%. The country's borrowing costs were slightly up at an auction .
Reporting by Medha Singh in Bengaluru; Editing by Kim Coghill and Gareth Jones
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