The cost of France's 10-year government borrowing has passed 5% for the first time since 2002. Chris Beauchamp of IG told Reuters that ultimately the ECB will be forced to step down, but things may have to get worse first

France's 10-year government bond yield has risen above 5% for the first time since 2002, according to Reuters. IG analyst Chris Beauchamp, cited in the same report, said the European Central Bank will ultimately be forced to step back from its current stance, though he suggested conditions may deteriorate further before that happens. The transmission mechanism here is a widening sovereign spread: higher French yields raise the funding cost of the eurozone's second-largest sovereign borrower and compress the ECB's room to keep policy rates restrictive without fragmenting the bloc's bond market. French government debt, Italian and other peripheral sovereign bonds, and euro-denominated financial stocks, particularly banks holding sovereign paper, are the most directly exposed. Traders should watch the next ECB policy decision and the accompanying press conference for any signal on bond-market intervention tools, such as the Transmission Protection Instrument, and for whether the spread between French and German 10-year yields continues to widen.

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