French government collapse lifts bond yields and dents the euro

France's political upheaval pushed borrowing costs higher and weighed on the euro after Prime Minister Francois Bayrou lost a confidence vote, forcing his resignation and prompting President Emmanuel Macron to name Sebastien Lecornu as his fifth prime minister in just over two years.

The benchmark 10‑year French government bond yield rose to about 3.49 percent as markets reacted to the sudden change in leadership and concerns about fiscal policy. The euro slid against both the pound and the dollar, while British 10‑year gilt yields remained the highest in the Group of Seven at roughly 4.6 percent.

The rise in French yields left them higher than those of Greece and close to overtaking Italian yields for the first time since 1998, according to market commentators. The move came amid a stand‑off in Paris over the budget and concerns about mounting public debt after Bayrou, speaking to parliament before the vote, described the country's debt as "life‑threatening."

Holger Schmieding, chief economist at merchant bank Berenberg, said the political impasse increased the likelihood of a sovereign credit rating downgrade, noting that agency Fitch was due to deliver its latest assessment on Friday. "The policy paralysis in Paris spells trouble for France and Europe," Schmieding said.

Investors and asset managers warned of a protracted period of market sensitivity. David Zahn, head of European fixed income at Franklin Templeton, said France was likely to be "a problem child for the bond markets for the next 18 months." Kevin Thozet of French asset manager Carmignac added: "France is the new periphery."

Currency traders reacted to the heightened political risk. The pound climbed to above €1.155 against the euro as sterling recovered from recent weakness versus the single currency. Simon Phillips, managing director at travel money firm No1 Currency, said the euro's depreciation could benefit British tourists travelling to Europe.

The latest government collapse compounds a period of political instability in Paris, with Macron now having appointed multiple prime ministers in a short span as his administration faces resistance over fiscal measures intended to rein in deficits. Market participants said the uncertainty surrounding fiscal commitments and the timing of policy decisions had amplified concerns about France's debt trajectory.

Analysts cautioned that near‑term market moves would hinge on the new government's stated budget plans and any signals from rating agencies. A downgrade by Fitch or another major agency could increase borrowing costs further and have spillover effects across the eurozone's financial markets.

For now, traders and policymakers are monitoring developments in Paris and the calendar for public debt reviews. The market reaction underlined how political events in a major eurozone economy can quickly affect sovereign borrowing costs and currency valuations across Europe.