Germany's 10-year bond yields dropped to 3.31% amid demand for safe assets, while France's borrowing costs rose due to political instability.
German government bond yields fell on Friday to a nearly two-month low. This continued a sharp decline for the second day in a row, as investors sought safe assets amid unrest in France and a general risk-off mood.
Germany's 10-year Bund yields reached 3.31%. In the previous session they posted the largest one-day drop since May. The indicator fell about 14 basis points over the week, pointing to sustained demand for defensive paper. Two-year bond yields dropped to 2.992%, the lowest level in three weeks.
In contrast to German paper, French bonds ended a difficult week with higher borrowing costs. Ten-year OAT yields rose 22 basis points over the week — the largest weekly jump since September. France's 10-year borrowing rate has moved higher in six of the past seven weeks and remained near multi-year highs above 5%.
The gap between falling German yields and rising French debt costs pushed the OAT-Bund spread to multi-year highs near 160 basis points.
Pressure on French debt stems from investor doubts about Paris's ability to reduce the budget deficit, which stands at 5.4% of GDP. Macron's administration faces political difficulties in parliament and public discontent over planned spending cuts.
Markets are preparing for central-bank meetings at the end of October. The ECB is expected to keep the deposit rate at 2.50%, although futures price in more than an 80% chance of a 25-basis-point hike in December. Strategists note that sovereign curves are also under pressure from large corporate-debt issues by technology companies for artificial-intelligence infrastructure.