Risk premiums on eurozone government bonds rose sharply on Thursday, a sign that concerns about France's fiscal and political situation are beginning to affect other markets.

The yield gap between Italian and German two-year government bonds nearly doubled to 55 basis points on Thursday, marking the largest widening on a closing basis since 2020. The spread between French and German two-year yields widened by as much as 22 basis points at one point.

At the same time, German government bonds rallied strongly as investors rushed toward the region's safest asset. The nervousness in the market shows that France's prolonged inability to bring its runaway public finances under control, and the resulting sell-off in French markets, is starting to more broadly dampen investors' appetite for risk.

Mike Riddell, lead portfolio manager of the Strategic Bond Fund at Fidelity International, said: "The situation in France has been deteriorating slowly but steadily, but today appears to be the first time the broader financial markets have taken notice."

At the same time, German government bonds rallied strongly as investors rushed toward the region's safest asset. The nervousness in the market shows that France's prolonged inability to bring its runaway public finances under control, and the resulting sell-off in French markets, is starting to more broadly dampen investors' appetite for risk.

Mike Riddell, lead portfolio manager of the Strategic Bond Fund at Fidelity International, said: "The situation in France has been deteriorating slowly but steadily, but today appears to be the first time the broader financial markets have taken notice."