French risk premium rises as PM resigns; politics shake long bonds

A man rides his bicycle in front of the Hotel Matignon, following a statement by French outgoing Prime Minister Sebastien Lecornu, who presented his government's resignation to the French president this morning, in Paris, France, Oct 6, 2025. REUTERS

French bond yields rose on Monday after Prime Minister Sébastien Lecornu unexpectedly resigned, pushing the premium of OATs over safe-haven German Bunds to its highest since January, as a political crisis in Europe's second-biggest economy deepened.

Markets are watching closely to see whether the next step in France will be a snap election, with the far-right Rassemblement National likely to play a leading role in the next government.

Meanwhile, ultra-long bonds came under pressure earlier in the day, following a surge in Japan's 30-year borrowing costs to a record high amid expectations of expansionary economic policies. Yields later retreated from those session highs.

Germany's 10-year Bund yields, the bloc's benchmark, rose 1.3 basis points (bps) to 2.72 percent.

Germany's 2-year yields, more sensitive to expectations for European Central Bank policy rates, dropped 1.5 bps to 2.0 percent, after touching 1.987 percent, their lowest since Sept 12.

French 30-year bond yields rose as much as 10.8 bps to 4.441 percent, their highest since Sept 4, before retreating to 4.40 percent. French 10-year yields rose 5.7 bps to 3.568 percent.

This left the yield gap between safe-haven Bunds and 10-year French government bonds a market gauge of the risk premium investors demand to hold French debt -at 85.49 bps. The spread earlier hit 87.96, its highest since Jan 13.

"The French-German yield spread is likely to widen further even if President Emmanuel Macron appoints a new prime minister, who would still face the same political gridlock that challenged Lecornu," said Massimiliano Maxia, senior rate strategist at Allianz Global Investors.

Traders slightly increased their bets on future ECB rate cuts. They priced in a roughly 40 percent chance of a 25-bps ECB rate cut by July, from 35 percent before Lecornu's resignation. The key rate is seen at 1.90 percent in February 2027, compared with the current 2 percent.

In Japan, 30-year yields jumped 13.5 bps to 3.28 percent, after reaching a new record at 3.301 percent.

Sanae Takaichi, who was poised to become Japan's new prime minister, has been a vocal advocate of "Abenomics", a hefty mix of government spending and monetary stimulus.

Expansive economic policies are expected to increase Japan's sovereign debt, raising the risk premium investors demand to hold ultra-long government bonds.

In the euro zone market, long bonds were also weaker.

"Beneath the surface, market moves hint at speculation about looming Dutch pension flows," said Hauke Siemssen, rate strategist at Commerzbank, referring to moves in euro zone sovereign bonds.

"With reports of three large pension funds shifting to the Defined Contribution scheme on Jan 1, 2026, we suspect that increased interest to unwind duration hedges could emerge from these funds."

Under the current Defined Benefit model, Dutch pension funds were major buyers of 30- and 50-year bonds. With the new Defined Contribution (DC) model, they no longer need to hedge long-term liabilities with long-duration assets.