European government bond yields rose on Wednesday. French papers consolidated near 2002 highs, while British gilts reacted to accelerating inflation.
On Wednesday, European government bond yields continued to rise. France's long-term borrowings remained near 2002 highs at around 4,957 percent, maintaining a noticeable risk premium compared to benchmark European papers. Investors factored in political instability and the budget crisis in Paris.
On the other side of the Rhine, yields on benchmark ten-year German bonds recovered to 3,420 percent after a sharp decline in the previous session. European debt markets remain under pressure due to events in France.
Fund managers revised sovereign risk estimates after anti-government protests and the introduction of curfews in Paris and Nice. France's budget deficit stands at 5.4 percent of GDP, complicating consolidation prospects. High energy prices and regional inflation indicators limit the scope for a rally in long instruments.
UK government bonds drew attention after data release. Annual consumer price inflation in September accelerated to 3.5 percent from 3.1 percent in August and exceeded forecasts. Yields on two-year gilts approached highs since the end of 2023, as markets reduced expectations of imminent Bank of England policy easing.
Traders are pricing in a high probability of a 25 basis point rate hike by the European Central Bank in December to 2.75 percent. The cost of insuring French bonds via five-year CDS held around 79 basis points — a high since 2013. The premium of French OATs over German Bunds exceeded 150 basis points.
Yield curves are also influenced by the growth in corporate placements, including from technology companies financing artificial intelligence infrastructure.