French 10-year yields rise after belt-tightening budget; German Bund yields climb
Updates at 0947 GMT
By Medha Singh
Oct 11 (Reuters) -French bond yields edged higher onFriday as investors assessed the government's 2025 budget to tackle a spiralling fiscal deficit, while German bond yields hit a freshone-month high.
Prime Minister Michel Barnier's new government, under pressure from financial markets and France's European Union partners to take action,outlined plans for 60 billion euros ($66 billion) worth of spending cuts and tax hikes on wealthy and big companies.
"The main points were well telegraphed through the media over the past weeks and should hence not take markets by surprise," said Citi Economist Michel Nies.
"Much of the adjustment burden falls on revenue increases, which will not be easy to achieve in the magnitude that’s pencilled in."
France's 10-year bond yields FR10YT=RR, which move inversely to prices, were up 3 basis points (bps) at 3.058%, hitting a five-week high.
The spread between France's and Germany's 10-year yields DE10FR10=RR stood at 76.8 bps, largely unchanged from a day earlier.
That spread, a gauge of the higher returns investors demand for holding French debt over the European benchmark, has been in focus since it widened sharply in the run up to France's parliamentary elections earlier in the year.
The government had previously said the budget bill will reduce the public deficit to 5% of gross domestic product (GDP) next year from 6.1% this year as a first step towards bringing the shortfall into line with an EU limit of 3% in 2029.
Goldman Sachs economists wrote in a note that the magnitude of the proposed consolidation and the corresponding reliance on tax increases leave them less confident in the ability of the government to meet its 2025 deficit target.
Fitch's review ofFrance's rating due laterin the day will be in focus, though markets see a bigger risk of a downgrade when Moody's updates it stance on Oct. 25.
All three of the major ratings agencies, including S&P Global, currently have a stable outlook in place, but this might be increasingly difficult to justify, Citi's Nies said.
Meanwhile, the euro zone benchmark German10-year bond yield DE10YT=RR gained 4 bpat 2.289%, rising to highest since early September on Thursday as a strong U.S. inflation report.
In the absence of major domestic economic catalysts, signs of strong U.S. economy and higher-for-longer U.S. interest rates outlook have recently been driving euro zone yields, pushing them to multi-week highs.
The European Central Bank's Oct. 17 meeting is now expected to take centre stage, with money markets almost fully pricing in a 25 bps rate cut.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was up 4 bp at 2.271%.
Elsewhere, Italy's 10-year government bond yield IT10YT=RR firmed 4 bps to 3.578%. The country's borrowing costs were slightly up at an auction .
Reporting by Medha Singh in Bengaluru; Editing by Toby Chopra and Kim Coghill
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