Price tags are seen as a woman shops at a local market in Nice, France. Reuters

France’s borrowing costs briefly rose above Spain’s for the first time since 2008 on Tuesday, according to LSEG data, in a sign of investor concerns about the new French government’s ability to tackle the high budget deficit.

Longer-dated eurozone bond yields ticked up slightly earlier in the session before sliding into negative territory, while more interest rate-sensitive shorter-dated yields fell further after US consumer confidence data unexpectedly fell in September.

They had slipped earlier in the day as investors nudged up their bets on another European Central Bank rate cut in October, after weak economic data on Monday.

Spanish bonds have traded with higher yields than French bonds since the financial crisis as the country is traditionally seen as a riskier investment.

But the so-called spread between French and Spanish 10-year bonds briefly fell into negative territory in morning trading in Europe, with both trading around 2.98 per cent, before rising again to stand at around 1.8 basis points.

“The market is obviously reacting to developments in France,” said Emmanouil Karimalis, macro rates strategist at UBS.

“Still there is no clarity in terms of fiscal (policy), and we also had very negative PMIs yesterday,” he said, referring to survey data that on Monday showed France’s business activity unexpectedly contracted in September.

France cannot realistically lower its budget deficit to an EU limit in three years but it could be possible within five years with the right course of action, Bank of France head Francois Villeroy de Galhau on Wednesday.

The previous government had planned to cut the fiscal shortfall to 3 per cent of GDP by 2027, but weak tax revenues and budget overruns have put that target all but out of reach, leaving a hole for the new cabinet that took office this month.

“Three years is not realistic, not economically or with regards to growth. But to do it in five years is possible,” Villeroy, who is also a policymaker at the European Central Bank, told France 2 TV.

Earlier this week, Finance Minister Antoine Armand said the budget deficit was one of the worst in French history. The last government had hoped to limit the 2024 budget deficit to 5.1 per cent of GDP, but the latest estimates suggest it may spiral towards 6 per cent.

The overshot puts huge pressure on new Prime Minister Michel Barnier to come up with billions of euros in budget cuts as well as a some targeted tax increases as it races to finalise the 2025 budget.

Investors have sharply increased the premium they demand to hold French debt compared with the country’s eurozone peers since President Emmanuel Macron called a surprise election in June. The poll resulted in a hung parliament, with the leftist bloc unexpectedly becoming the biggest grouping.

France’s newly appointed finance minister Antoine Armand on Tuesday acknowledged concerns over his young age and lack of experience and said the country faced “one of the worst deficits in our history”. The deficit could reach 6% this year, well above the European Union’s limit of 3 per cent.

The German 10-year bond yield, the benchmark for the eurozone bloc, was last slightly lower at 2.148% after falling 5 bps on Monday. Yields move inversely to prices.

Germany’s two-year bond yield, which is more sensitive to European Central Bank rate expectations, was down 6 bps at 2.104%, around its lowest since March 2023.

Traders on Tuesday saw an over 50 per cent chance of an ECB rate cut in October, up from around a 15% chance at the start of the week, according to money market pricing.

Monday’s survey data showed eurozone business activity as a whole contracted sharply and unexpectedly this month as the dominant services industry flatlined.

“The decline in the euro area PMIs to levels below all estimates is reviving speculation about the next ECB rate cut already in October,” said Christoph Rieger, head of rates and credit research at Commerzbank.

China’s unveiling of the largest stimulus package since the pandemic, aimed at boosting an economy weighed down by a property crisis, did little to move eurozone bonds.

Italy’s 10-year yield was down 3 bp at 3.495 per cent.

Prime Minister Michel Barnier has suggested he would be open to raising taxes on the wealthy and some corporations. Spending cuts are also expected, which Villeroy said in the interview that he supported.

Time is running out for the government to finalise its 2025 budget and hand it over to lawmakers, with mid-October the very latest if it is to be passed by parliament before the end of the year, the head of the Cour des Comptes public audit office Pierre Moscovici said.