On Tuesday, European government bond markets continued to fall due to political instability in France. The yield on French securities rose sharply, and the cost of default insurance approached 2013 levels.
On Tuesday, European government bond markets continued to face selling pressure. The reason was the escalation of the political situation and civil unrest in France, which led to a large-scale sell-off of French sovereign debt.
The sell-off caused the largest one-day increase in French bond yields in almost a month. The yield on two-year securities reached 3.647 percent. Five-year credit default swaps on French debt were around 79.05 basis points, remaining near highs since 2013.
Mass demonstrations against the high cost of living and inflation turned into riots and looting in major cities. Authorities imposed a curfew in city centers, including Paris and Nice. These events highlighted the political paralysis of President Emmanuel Macron's administration and reduced the chances of reducing the budget deficit, which stands at 5.4 percent of GDP.
The spread between yields on French OATs and German Bunds widened significantly. The effect spread to other markets: German Bund yields rose to 3.450 percent after a large one-day jump. Yield curves in Spain and Italy came under pressure.
ECB President Christine Lagarde warned that the rise in borrowing costs would slow economic activity. Money markets are pricing in a high probability of a 25 basis point ECB rate hike in December. Analysts note that European bond yields are additionally constrained by competition with corporate issues to finance the development of artificial intelligence.