Will rising French bond yields spark a wider crisis?

Fears over the sustainability of heavy government borrowing have triggered an aggressive sell-off across European debt markets. That pressure has widened France's borrowing premium over benchmark German government bonds to 1.4 percentage points.

The sovereign debt sell-off quickly raised borrowing costs across the wider corporate sector and rattled European financial credit markets. As risk premiums on senior bank bonds climbed, investment head Thomas Höfer warned that Stress in French government bonds has already spread to the valuation of French banks.

Even so, major financial institutions benefit from strong international revenues and diversified asset holdings rather than heavy exposure to domestic sovereign bonds. With contagion fears widely seen as overdone, portfolio manager Christian Knopf noted that Investors distinguish between the French state and French companies.