LONDON: French government bond yields rose on Monday, pushing the gap over safer German peers to its widest since May, after more violent anti-government protests in France over the weekend.
The turmoil in France comes as heightened global trade tensions, a looming vote in Britain's parliament on Brexit and caution before this week's European Central Bank meeting are already bolstering demand for top-rated German debt.
While higher-rated French bonds often benefit from risk aversion in world markets, turmoil in France prompted investors to stay away.
The anti-government protests will slow growth to close to a standstill in the final quarter, the central bank said on Monday, complicating President Emmanuel Macron's task of finding concessions to placate the "yellow vest" movement.
The Bank of France on Monday forecast the euro zone's number two economy would eke out growth of only 0.2 percent in the quarter from the previous three months, down from 0.4 percent in a previous estimate.
"Concern about a bit of political and fiscal capitulation is rarely good for a bond market," said Chris Bailey, European strategist at international financial services firm at Raymond James.
"In the wider scheme of things, the bond spread is pretty tight versus Germany but does show a bit of tension in the European bond fraternity."
French bond yields were up to 7 basis points higher on the day across the curve, with France standing out as the weakest performing bond market in the bloc.
Ten-year bond yields rose over 3 bps to 0.72 percent , almost 8 bps above 4 1/2-month lows hit last week.
The gap between 10-year bond yields in France and Germany stood at around 46 basis points, its widest since late May, when a rout in Italian bonds rippled over into other euro zone bond markets except Germany.
Macron will make a televised address at 1900 GMT as he seeks to placate protesters, whose revolt poses his biggest challenge yet since assuming the presidency 18 months ago.
Analysts said Macron is expected to announce new fiscal measures, implying some upward pressure for French yields.
"The big picture is that the budget deficit will worsen and political problems will make cuts to spending hard," said Rabobank rates strategist Lyn Graham-Taylor.
French bonds also underperformed other euro zone peers -- the Spanish/French 10-year bond yield gap was at its tightest since October as French yields rose.
Political uncertainty also put upward pressure on Belgian yields. Prime Minister Charles Michel re-launched his government on Sunday as a minority administration after the biggest party in his coalition quit in a dispute over a United Nations migration compact.
Italy's bond yields fell 4-5 bps on hopes of a compromise with the European Union over Italian budget plans.
Italian Prime Minister Giuseppe Conte is expected to meet European Commission President Jean-Claude Juncker on Wednesday over the 2019 budget, a source said on Monday.
"This morning, the rumours are that Italy could present another revised budget this week and that has helped push yields lower," said DZ Bank analyst Sebastian Fellechner.
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