Unrest and deficit fears raise French bond yields and widen the spread with Germany

French bond yields rose on Monday, and the difference between them and German bond yields widened, after the widespread turmoil that France witnessed over the weekend highlighted the difficulties the government faces in reducing the large fiscal deficit in the second largest economy in the euro zone.

France, which is suffering from weak growth and worsening public debt, witnessed some of the worst unrest in years over the weekend. Thousands of people were arrested, while stores were looted or damaged, following protests against high prices and the decline in the level of public services, according to Reuters.

The French ten-year bond yield rose by 6 basis points to 4.84 percent, while the corresponding German bond yield, which is a benchmark for the euro zone, settled at 3.41 percent.

London Stock Exchange Group data showed that the two-year French bond yield briefly rose by 10 basis points, before settling at a rise of two basis points at 3.57 percent.

Concerns about the volume of French borrowing had pushed the ten-year bond yield to 4.99 percent in early October, before market movements calmed down last week.

Political maneuvering, with the presidential elections scheduled for next year approaching, may further complicate the situation, with potential repercussions on the markets.

Jim Reed, global head of macroeconomic research at Deutsche Bank, said in a morning note that the turmoil “will not make international investors completely comfortable buying French Treasuries, so the limited gains made by French bonds over the past week or so will be tested today.”

He added, “France is indeed facing a difficult financial situation.” “With the 2027 elections approaching, the weekend’s events add a new layer of political risk to markets.”

Traders' interest is focused on whether the rise in French bond yields will spread to other countries in the euro zone that suffer from high debt levels, and Italy stands out as the first country worth monitoring. On Monday, the Italian ten-year bond yield rose by 4 basis points to 4.52 percent.

Developments in France also cast a shadow on the euro, which fell by between 0.1 and 0.2 percent against the dollar, the British pound, and the Japanese yen.

On the stock market, French stocks were likely to perform weaker than their counterparts in the region, as futures contracts for the French CAC 40 index of leading stocks fell by 0.8 percent, compared to a decline of 0.5 percent for futures contracts for leading stocks in the euro zone.

The Reserve Bank of India's first liquidity injection in more than three months witnessed strong demand from banks on Monday, as overnight borrowing rates remained close to the upper end of the central bank's interest rate range.

The operation comes months after the central bank withdrew surplus liquidity from the banking system, after it reached record levels as a result of large inflows of deposits from Indians residing abroad, which were mobilized to support the rupee, which is facing pressure on its exchange rate, according to Reuters.

The persistence of large liquidity surpluses for long periods may exacerbate inflation and raise asset prices. But short-term borrowing costs among banks have risen sharply in recent weeks, after the central bank raised interest rates earlier this month for the first time in nearly four years and signaled the possibility of continuing monetary tightening in the face of rising inflation.

During Monday's operation, the central bank pumped one trillion rupees ($10.53 billion) through a reverse repurchase agreement with a variable interest rate for a period of seven days, while bank offers exceeded 1.5 trillion rupees, ahead of the exit of large amounts of liquidity as a result of tax payments.

Sakshi Gupta, an economist at HDFC Bank, said that pumping liquidity is a “situational response to fluctuations in liquidity conditions,” adding that the return of excess liquidity to more moderate levels means that the central bank will resume its operations to carefully control liquidity, and the need for additional measures to absorb it in a sustainable manner, such as selling bonds on the open market or implementing foreign currency buying and selling swaps, may decrease.

On Friday, the weighted average interest rate on interbank lending for one night recorded the first close above the marginal deposit facility rate since the beginning of the current fiscal year, while it remained close to that level on Monday.

The central bank's repurchase rate is 5.50 percent, compared to 5.75 percent for the marginal deposit facility rate.

The surplus liquidity in the Indian banking system fell to less than two trillion rupees, equivalent to 0.7 percent of deposits, on October 16, for the first time in two and a half months.

A trader at a private bank said that Tuesday's holiday means a large portion of liquidity will be released to pay the goods and services tax on Monday, which may have required quick intervention from the central bank.

Global food prices are heading for a new acceleration in the coming months, with inflationary pressures expected to continue until 2027, in light of war-related shipping disruptions, rising fertilizer costs, and the risks of drought resulting from the “El Niño” phenomenon, which are factors that put pressure on grain supplies and increase the burden on consumers, especially the most vulnerable groups.

In the center of the Indonesian capital, Jakarta, Muhammad Yasin, a 63-year-old parking attendant, says he was forced to reduce his meals as the prices of basic foodstuffs rose to levels beyond his purchasing power, according to Reuters.

Yassin, whose weekly income ranges between 200,000 and 300,000 Indonesian rupiahs, said that the cost of purchasing rice, tempeh and tofu, which previously ranged between 7,000 and 8,000 rupiahs (equivalent to 0.39 to 0.44 dollars), has now risen to 15,000 rupees.

The suffering of Yassin, a father of four children, comes at a time of increasing pressure on global food markets. In Indonesia, rice prices reached record levels amid expectations of delayed rains, while bread prices in Egypt rose by about a quarter, and sugar in India recorded its highest prices ever, after a weak rainy season, the most severe in more than a decade, led to a decline in production.

Maximo Torero, chief economist at the Food and Agriculture Organization of the United Nations (FAO), said that these developments have put the food system under great pressure, and he expects their effects to worsen at the end of this year and at the beginning of next year, and perhaps throughout 2027.

The lowest-income groups are bearing the brunt of this increase, with food prices rising in a number of low- and middle-income countries in the Middle East, North Africa and Asia, with food accounting for a larger share of household spending.

According to the World Bank, the rise in food prices exceeded the general inflation rate during the third quarter in 22 percent of the 150 countries included in the analysis, compared to 14 percent during the previous quarter.

The Food and Agriculture Organization's Food Price Index, which tracks monthly changes in the prices of a basket of internationally traded food commodities, averaged 136 points in September, its highest level since November 2022.

The repercussions of rising prices are not limited to a decline in purchasing power, but also extend to an increased risk of social unrest, as well as the possibility that major food exporting countries may resort to imposing restrictions on exports, which may exacerbate supply shortages in global markets.

Multiple shocks put pressure on supplies

Attacks on grain infrastructure in the Black Sea region have disrupted wheat shipments, prompting major importers, including Egypt and Indonesia, to look for alternative sources. At the same time, security risks in the Red Sea have diverted ships toward longer, more expensive routes around Africa.

The US-Israeli war on Iran increased pressure on food markets, by raising fuel prices and disrupting fertilizer exports that pass through the Strait of Hormuz, which raised agricultural production costs, coinciding with the effects of dry weather associated with the “El Nino” phenomenon on crops in India and Southeast Asia.

In this context, wheat prices have risen by more than 30 percent since the beginning of 2026, while rice prices in major Asian exporting countries have risen by rates ranging between 10 and 13 percent, despite abundant stocks. Although fertilizer prices have declined from their peak recorded earlier in the war on Iran, they remain at high levels.

Manish Tiwari, Chairman and Managing Director of Nestlé India, said that the rise in inflation, especially food price inflation, has become a tangible reality, noting that the rise in costs of primary commodities exacerbates the challenges facing the sector.

In Egypt, the price of a loaf of unsubsidized bread rose to about five pounds, compared to four pounds last July. In the United Arab Emirates, cooking oil prices have increased by about 40 percent, while vegetable oil prices in Indonesia have risen by 7 percent since the beginning of the year, despite being the world's largest palm oil producer.

In India, the prices of sugar, onions, and legumes jumped by more than 10 percent during September compared to the previous month, as a result of a lack of production.

The pressures are not limited to raw material prices, but also include operating costs. Sayed Abdel Hamid Mohamed, a baker in central Cairo, said that the rise in prices is not related to flour alone, explaining that the wages of skilled workers and the costs of electricity, water, yeast, and other bread production requirements have also risen.

For his part, Tariq Azab, one of the bakery’s customers, said that prices have been rising for years, and not once, twice, or three times.

Shipping costs have increased by about 50 percent on some major trade routes, including the route linking the Black Sea to Southeast Asia, due to high oil prices and increasing risk premiums associated with wars.

The decline in inventories and the return of importers herald a new wave of rising prices

Although food prices have been rising since late 2025, the shrinking domestic supplies and the transmission of the increase in primary commodity costs to consumers threaten to accelerate the pace of inflation during the coming period.

It is expected that major food importing countries in the Middle East and Africa will return to global markets to meet their needs, after they refrained from buying in the wake of good local harvests. The simultaneous return of these countries to imports may lead to a sharp increase in global demand.

Alexander Karavaytsev, chief economist at the London-based International Grains Council, said markets could see a new, large wave of demand over the next few months as importers return to buying.

For his part, Torero warned that the buffers provided by record global stocks of grains were beginning to shrink. He explained that abundant stocks and previous seasons' crops helped absorb shocks, but these margins are under increasing pressure, which may make the rise in commodity prices more severe.

Food manufacturing companies, in turn, face higher costs, as companies that usually rely on raw material supply contracts extending from three to six months are forced to renew them at high prices. Weak local currencies also increase the cost of imports.

Franciscus Welirang, one of the directors of PT Indofood, the largest food company in Indonesia, said that the high shipping costs exacerbate the burden, especially when converted into Indonesian rupiah in light of the decline of the local currency.

The challenges are not limited to high prices, as food producers face difficulties in securing the necessary quantities of raw materials, according to market traders.

In Indonesia, several wheat mills are operating below their production capacity, after the Russian-Ukrainian war led to a decline in the arrival of shipments. An executive at a flour milling company in Jakarta, who requested anonymity, said that the lack of supplies is affecting the activity of mills.

Data from marine analytics company Clipper showed that Indonesia's wheat imports fell by 41 percent year-on-year in September, to 491,000 metric tons.

In contrast, soybean and corn stocks remain abundant, but future supply prospects will depend on the volume of production in the United States and South America. The rise in oil prices has contributed to supporting the prices of the two crops, due to their growing use in the production of biofuels.

Wheat harvests in the Southern Hemisphere are expected to be favourable, but any potential decline in production in exporting countries, such as Australia and Argentina, may constitute an additional factor pushing prices higher.

Karavaytsev warned of great risks of further rise in prices, in light of continued pressure on supplies and the possibility of importers returning forcefully to global markets.