French bond yields rise after the nation's worst unrest in years

Updates with early trading

LONDON, Oct 19 (Reuters) - French bond yields rose on Monday and their gap with German yields widened after widespread weekend unrest in the euro zone's second-largest economy emphasised the difficulty the French government faces in reducing its large deficit.

France, contending with weak growth and ballooning debt, suffered some of its worst unrest in years over the weekend. Thousands of people were arrested and shops were looted or damaged after protests over high prices and declining public services.

France's 10-year yield was last up 6 basis points at 4.84%, FR10YT=RR while Germany's 10-year yield, the benchmark for the euro zone, was flat at 3.41%. DE10YT=RR

France's 2-year yield briefly traded up by 10 bps, LSEG data shows, but was last up 2 bps at 3.57%. FR2YT=RR

Worries about the scale of French borrowing pushed up France's 10-year yield to 4.99% in early October, though moves calmed last week.

Political jostling ahead of next year's presidential election could also complicate matters, with ramifications for markets.

The unrest "won't make it easy for the international community to be totally comfortable buying OATs (French bonds), so the modest recovery in French spreads over the last week or so will be tested today", Jim Reid, global head of macro research at Deutsche Bank, said in a morning note.

"With France already facing a difficult fiscal backdrop and the 2027 election approaching, the weekend adds another layer of political risk for markets," he said.

One particular focus for traders is whether the jump in French yields spills over to other heavily indebted parts of the euro zone. They see Italy as the first to watch. Italy's 10-year yield was up 4 bps on Monday at 4.52%. IT10YT=RR

Developments in France also weighed on the euro, which was down 0.1-0.2% on the dollar, sterling and yen on Monday. EUR=, EURGBP=, EURJPY=

French stocks were also set to underperform, with futures on the CAC40 blue chip index down 0.8% against a 0.5% decline for euro zone blue-chip futures. FCEc1, STXEc1

(Reporting by Amanda Cooper and Alun John
Editing by Dhara Ranasinghe and David Goodman)