France's 10-year yield jumped 13 basis points to about 4.94%, nearly double the morning's move, while Italy's rose 11 basis points. Germany's moved just 3. European bank stocks led a 1% fall in the Euro Stoxx 50 ahead of Tuesday's budget vote in Paris.
On Monday morning, the bond market's reaction to France's riots looked like a French problem. By the close, it had become a European one.
The yield on France's 10-year government bond rose 13.1 basis points to 4.936% in late European trading, nearly twice the rise seen in the first hours of the session. Italy's 10-year yield climbed about 11 basis points to about 4.59%. Germany's 10-year Bund yield rose only about 3 basis points, to 3.456%.
The Euro Stoxx 50 fell about 1% to 6,141 and the broader STOXX 600 about 0.9% to 639. Banks led the decline, with Deutsche Bank, BNP Paribas, Santander, UniCredit and Intesa Sanpaolo each down more than 2%. Airbus and Rheinmetall fell nearly 3%. The euro slipped about 0.25% to about $1.1215.
A spread move, not a rate move
The gap between French and German yields is the cleaner measure of stress, since global yields also rose on Monday. On late prints, the French premium over Bunds was roughly 148 basis points, by this publication's arithmetic, around the 147 basis points reached on Oct. 2, the widest of the past year. France now pays more to borrow for 10 years than Italy or Greece.
Italy's move is the more telling one. Protests in Milan, Turin and Bologna turned violent over the weekend. When investors sell Italian and French debt together, and sell the banks that hold it, they are testing whether one country's fiscal trouble can spread across the region.
The calendar
On Tuesday, deputies vote on the 2027 budget's revenue section. Laurent Panifous, the minister for relations with Parliament, said last month that adopting the budget by a vote would be "very difficult" (translated from French). About 550,000 people marched on Saturday, according to authorities' figures. Moody's reviews France's rating on Friday, Oct. 23, after European markets close. The European Central Bank meets on Oct. 29.
The view from strategists
Sharon Bell, an equity strategist at Goldman Sachs, said spreads are not narrowing because investors doubt the government's ability to consolidate its finances, though she does not see conditions that warrant emergency action from the ECB, which has a tool designed for disorderly spread moves. Ken Egan of rating agency KBRA said French debt auctions last week showed "still very solid underlying demand."
Market implications
One reading is that contagion has started. The French move doubled during the day, Italy followed, and banks sold off, which is the sovereign-bank loop that defined the euro crisis more than a decade ago.
A second reading is that this is France-specific repricing in a system that still works. Auctions are well covered, the euro's move was modest, and the spread remains well below the record of nearly 190 basis points set in November 2011.
What to watch
Tuesday's Assembly vote; the official French-German spread series; Italian bond auctions; any comment from ECB officials before Oct. 29; and Moody's on Friday. A French spread closing well above 150 basis points before the rating review would put the ECB's backstop at the center of the debate.