France’s 10-year government bond yield reached 5% on Oct. 21, Reuters reported, sharpening concern about how persistently high borrowing costs could affect euro zone banks’ bond portfolios and refinancing bills.
The yield was France’s highest since July 2002, according to Reuters, which cited LSEG data. The gap between French and German 10-year yields reached 150 basis points.
Reuters measured a 17% fall in shares of France’s three largest lenders over the six weeks through Oct. 21. European bank shares declined about 10% over the same period, roughly five times the broader market’s drop.
The European Central Bank (ECB) said banks shifted some excess reserves into bonds issued mostly by euro area governments as central bank liquidity declined. Those bonds help banks meet liquidity needs, but greater reliance on them increases exposure to interest-rate and credit risk, the ECB said. By the end of 2025, banks in most euro area countries had reduced the share of sovereign debt held in bonds issued by their home governments.
Reuters’ analysis of European Banking Authority data put euro zone banks’ net sovereign bond holdings at €4.3 trillion at the end of June 2026, about twice the level during the earlier debt crisis. Home-country bonds accounted for 41% of those holdings, down from more than 50% in 2013. Banks also had more capital relative to their sovereign holdings than they did then, the analysis found.
Reuters identified French banks as the European Union’s largest issuers of debt in wholesale markets. Reuters cited analysts as saying sustained high government yields could raise French banks’ wholesale refinancing costs.
The European Commission says the earlier euro area debt crisis exposed a cycle in which government financial stress weakened banks holding public debt, while bank losses added pressure to state finances. “Banks come from a better starting point but they are not immune,” Simon Ainsworth, senior banking analyst at Moody’s Ratings, told Reuters.
The Commission is seeking views on rules for banks’ sovereign debt holdings. A broader banking package is planned for the first quarter of 2027.
