Riots push OAT–Bund spread to a two-week high near 145bp

The spread isolates the risk. France and Germany share a currency and a central bank, so when the French yield jumps and the Bund doesn’t, the market is repricing France alone. In early October, French yields rose alongside a global bond sell-off. On Monday the Bund didn’t move at all: the trigger was domestic.

The riots turn a fiscal problem into a political one. France’s 2027 budget contains about €43bn of deficit-cutting measures. A government with no majority has to get it through the Assembly, starting with a vote on the revenue side expected on Tuesday, while students and unions are on the streets over living costs. The more expensive austerity looks politically, the more investors doubt it will be delivered, and the bigger the premium they demand to hold French debt.

There is no safety net. ECB President Christine Lagarde said on 14 October that France must fix its own finances, rejecting the idea of an ECB backstop, a promise to buy French bonds if yields spiral. That leaves the spread as the market’s running score of French risk. French banks, which tend to trade as a proxy for their home government’s credit, were among the hardest hit in equities.

The euro is feeling it, but far less: it fell about 0.2% to around $1.12. For the currency, the question is whether the stress spreads to other euro-area bonds, which is contagion. Italy’s spread over Bunds also widened on Monday, to about 109–111bp. Even so, France still pays about a third of a percentage point more than Italy to borrow for 10 years.

First, Tuesday’s budget vote. The Assembly is expected to vote on the revenue side of the 2027 budget on Tuesday 20 October, according to one report, and the government has no majority. A defeat would deepen doubts that the deficit-cutting measures can be delivered. The full bill is due a vote on 17 November.

Moody’s on Friday 23 October is the biggest test. It reviews France’s Aa3 rating, which already carries a negative outlook, a warning that a cut may follow; one commentary frames the choice as keeping that outlook or downgrading. Rating decisions typically land after the market close, so the reaction would come at the next open. That is gap risk: the price jumps while the market is shut, and a stop-loss can’t catch it.

The streets are another test. Yellow Vest leaders have reportedly called a new protest day for Saturday 24 October, and five unions a strike for 5 November. A calm weekend would ease the pressure; more violence would make the budget harder to pass.

Then the ECB on Thursday 29 October. In a Reuters poll, all but 3 of 73 economists expect it to hold. The deposit rate would stay at 2.50%, and most expect a hike in December. A hold offers French bonds nothing, so listen for how Lagarde answers questions on France.

And watch the spread around 145bp. Its 2 October peak was above 150bp on EFG’s numbers, though another data series had about 147bp that day. A move back above 150bp would say the market sees a new leg of French risk. A quick return towards Friday’s 137.4bp would say Monday was a scare.