Key Takeaways
- French government bonds have underperformed those of other eurozone countries due to political instability and concerns about public debt.
- The spread between French government bonds and German bunds has widened, while the spread against Italian BTPs has fallen into negative territory.
- Euro government bond fund managers with a positive Morningstar Medalist Rating underweighted France even before the latest government crisis.
French government bonds have declined by more than 10% since the beginning of the year, compared with a 0.52% rise in the prices of eurozone government bonds. Political instability and investor concerns about the sustainability of public debt have triggered massive selling of French bonds, also called OATs, which have seen their yields soar. The two variables move in opposite directions.
French OATs account for 24.37% of the Morningstar Eurozone Treasury Bond Index, more than Italian BTPs at 21.58% and German Bunds at 19.17%, but some active fund managers significantly underweight these bonds in their portfolios.
French Government Bonds Have Become Riskier
The 10-year French government bond yield has risen by about 0.3 percentage points this year, reaching the 3.50% mark at the close of trading on Friday, October 10. The perception of greater risk has resulted in a widening of the spread compared to German Bunds, which are used as a benchmark in the eurozone. That spread reached 90 points on October 6, when Prime Minister Sébastien Lecornu resigned after only 27 days in office. He was then given a second mandate to form a government and announced the suspension of a controversial pension reform until the 2027 presidential elections. This way, he survived parliamentary confidence votes.
Pressure on French government bonds has caused the spread with Italian BTPs, historically considered riskier, to converge, bringing it into negative territory with French government bonds suddenly perceived as more dangerous at the peak of the crisis.
Funds Least Exposed to French Government Bonds
We analyzed active euro government bond funds that have less exposure to French debt and that have been less affected by the decline in prices. We selected funds with at least EUR 100 million in assets, domiciled in Europe, and available in European countries. We excluded funds that invest more than 90% in government bonds of a single country, such as Italy or France, and those with portfolios not updated as of July 31, 2025. In this regard, it should be noted that exposure to France may have changed in recent months compared to the situation at the latest available portfolio disclosures.
The table below lists the euro government bond funds with the lowest exposure to French public debt, using long positions. The net position, given by the difference between the long and short positions, may be different. The manager of the Franklin Templeton Euro Government Bond Fund, for example, said that they had a positive notional exposure of 3.5% in market value as of August 31, as they owned two French government bonds and were short on OAT futures.
The funds may be available to private investors in classes other than those shown in the table, therefore Morningstar ratings may also differ, as they are assigned at the fund class level.
Let’s take a closer look at the three euro government bond funds with the lowest exposure to France and with a positive Morningstar Medalist Rating - those that, according to Morningstar researchers, have the potential to outperform the category index in the long term. The rating scale includes three positive levels—Gold, Silver, and Bronze—one neutral level, and one negative level.
Generali Investments SICAV - Euro Bond Fund
The fund, which has assets of EUR 2.75 billion, is exposed to French debt for 2.96% of its portfolio, underweighted by 21.41 percentage points compared to the Morningstar Eurozone Treasury Bond Index, based on the portfolio as of August 31. The fund is overweighted in peripheral countries, particularly Italy, Spain, and Greece.
“We confirm the underweighting of France in all the government funds we manage,” explains Massimo Spagnol, fixed income manager at Generali Asset Management. “The underweighting has been in place for some time, but particularly since the beginning of 2024, anticipating the political crisis that unfolded during the summer of last year.” Spagnol adds that the portfolios have benefited from this strategy “both in relative terms compared to the benchmark and in absolute terms.”
The fund, which has a Bronze Medalist Rating, has gained 2.09% since the beginning of the year, outperforming the Morningstar Eurozone Treasury Bond Index by 1.16 percentage points. Last year, the fund returned 3.07%, placing it in the eighth percentile of its category.
Robeco Euro Government Bonds
The fund, which has assets of EUR 1.01 billion, has an exposure to French government bonds of 13.61%. French debt is underweighted by 10.76 percentage points compared to the Morningstar benchmark index, based on the portfolio as of August 31. The fund is overweight Germany, which accounts for 62.17% of the portfolio, compared to 19.17% in the Morningstar Eurozone Treasury Bond Index.
The fund, which has a Silver Medalist Rating, has gained 1.84% since the beginning of the year, outperforming the Morningstar benchmark index, and 1.36% in 2024, placing it in the 64th percentile.
BlueBay Investment Grade Euro Government Bond
Based on portfolio data as of August 31, 2025, the fund, which has assets of €4.11 billion, had an exposure to France of 14.76%. French debt is underweighted by 9.61 percentage points compared to the Morningstar Eurozone Treasury Bond Index. However, Kaspar Hense, co-manager of the fund, says that they opened a short position in France in the middle of August “with the thinking that the political debate will get messy into the budget season.” He adds that in their benchmark strategies, “that meant we hardly had any exposure to France. We closed the position at the heights of the crisis after Lecornu resigned.”
The fund, which has a Silver Medalist Rating, has gained 0.97% since the beginning of the year, broadly in line with the Morningstar benchmark index, and 2.99% in 2024, placing it in the ninth percentile.
