French Bond Selloff Fuels Eurozone Contagion Fears

The euro fell below $1.12 on Monday, Oct. 5, a 17-month low, after French 10-year yields hit their highest since 2002 and the French-German 10-year spread reached its widest since 2012. France proposed a €54 billion savings plan to cut the deficit from 5.5% of GDP this year to 5% next year; Prime Minister Sébastien Lecornu warned it could reach 6.5% without more measures. The Italian-German yield gap hit almost 130 basis points. Spain's Pedro Sanchez called a snap election Monday after rightwing parties blocked housing legislation. Kit Juckes said the bond sell-off is seeing bigger moves in anything perceived as more vulnerable and that euro selling has gathered momentum. Goldman Sachs analysts said spreads do not matter for the currency until they are the only thing that matters. Stephen Jen said if fiscal contagion risk in Europe is not contained, euro/dollar could trade lower. Erin Gibbs warned that bond contagion starting in France is the greatest risk to stocks. Bank of America estimates every 10 basis points of French-German spread widening associates with a 0.4% euro/dollar fall. Left-leaning coverage leads with a French debt crisis and brutal bond sell-off as contagion risks; right-leaning coverage leads with France's debt as Europe's problem and a stock threat. Further spread remains unresolved.