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France's 10-year government bond yield rose above 5% on Tuesday, touching its highest level in 24 years as concern over the country's fragile public finances drove selling in the bond market.

The rise pushed the difference between French and German 10-year yields to as much as 157 basis points, reflecting a deepening fiscal and political crisis and growing unease before a Moody's rating decision expected on Friday.

Borrowing costs climb faster than rivals

France's 10-year yield tested 5.002% during the session after gaining 8 basis points. The gap between the French yield and the 10-year German bund, the euro zone's benchmark, widened to as much as 157 basis points, roughly 1.6 percentage points.

Central banks had already pushed global bond yields higher this year by raising interest rates in response to rising energy prices. As developed economies struggle with growing debt burdens, France's borrowing costs have risen much faster than those of its peers, driven by the country's worsening fiscal and political crisis.

French borrowing costs stood at about 3.2% at the end of February before climbing as the war in the Middle East fueled inflation and pressured highly indebted economies. France has taken the biggest hit in bond markets among G7 countries.

Unrest and political uncertainty weigh on markets

Behind the sharp repricing stands a weakened government struggling to push reforms through the National Assembly that would reduce a large budget deficit. Looting and violence during otherwise peaceful demonstrations across France over the high cost of living and the education system have deepened market distrust.

Political uncertainty ahead of next April's presidential election is adding to the fragility. Polls showing far-right leader Marine Le Pen and hard-left opposition figure Jean-Luc Mélenchon pulling further ahead of other candidates are seen by analysts as the worst-case scenario for efforts to narrow the budget deficit.

Analysts say the political appetite for fiscal discipline before the election is weak and warn that the risks priced into markets could grow. A continuation of social unrest is expected to add pressure on an economy already squeezed by tight financial conditions, political uncertainty and contractionary fiscal policy.

Moody's decision in focus

Against this backdrop, markets are waiting for the Moody's decision on France due on Friday. The country currently holds an Aa3 rating with a negative outlook, so a possible downgrade is among the risk scenarios being weighed by investors.

Key takeaways

• France's 10-year bond yield tested 5.002%, its highest level in 24 years, after an 8 basis point rise.
• The spread over German 10-year yields widened to as much as 157 basis points.
• Unrest, government weakness and uncertainty before next April's presidential election are driving the sell-off.
• Moody's is expected to issue its decision on France on Friday; the country holds an Aa3 rating with a negative outlook.