Key Takeaways
- France’s bond yields have jumped amid a growing budget deficit and ahead of the 2027 presidential election.
- The premium investors demand to hold French debt is at its higherst level since the 2008 financial crisis and analysts expect continued widening.
- The selloff in French bonds comes amid a widespread selloff in government debt markets on the back of worsening inflation pressures and growing budget deficits in key economies.
Bond yields have been rising across the world’s major economies this year, but the jump in French rates—and the country’s worsening fiscal outlook—is drawing comparisons to fiscal crises that hit Europe during the 2010s.
France is running one of the largest budget deficits in the euro area and, following years of political upheaval, investors are questioning the country’s resolve toward fiscal consolidation.
In the background, the country appears on a path for a tumultuous presidential election in 2027. In the coming week, French Senate elections could highlight the strains within the country that could make tackling its budget problems difficult.
The yield on the benchmark 10-year OAT hit an 18-year high this past week at 4.6%, up from 4.2% at the end of August and just under 3.6% at the end of June. As sharp a move as that is, a bigger focus is on how poorly French debt is performing relative to safer German Bunds. The spread between French 10-year OAT and German Bund yields—which measures the additional return investors demand to hold French debt versus the German equivalent—rose to more than 1.05 percentage points. At that level, the spread is at heights not seen since the euro area sovereign debt crisis of 2010-2012.
The selloff in France comes amid a broader spike in sovereign yields around the world.
While analysts do not see France on track to trigger the kind of continent-wide crisis seen during those years, they do deem the loss of confidence among investors to be similar to that faced by Italy in 2018. At that time, political uncertainty and concerns about loose fiscal policy sparked an Italian bond market crisis, with BTP spreads widening to a peak of 300 basis points from around 130 basis points.
“Italy in 2018 offers a closer comparison,” says Marie-Anne Allier, a fixed-income fund manager at Carmignac. “Although France is not currently experiencing the same level of stress and Frexit is not on the table, the Italian episode remains an example of how fiscal concerns can become more serious when investors lose confidence in the credibility of a government’s budgetary plans.”
Emilia Matei, sovereign analyst at Aviva Investors, says France in 2026 faces a heady combination of challenges that now make it a negative outlier in the region. “France’s risk premium reflects a difficult mix of weak growth, fiscal deterioration and political fragmentation. While several European economies have shown modest growth this year, France has lagged. Domestic demand remains subdued, while policy uncertainty is weighing on consumption and investment.”
France’s Deficit-Taming 2027 Budget Bid
French Prime Minister Sébastien Lecornu last week sought to demonstrate his commitment to taming the deficit, announcing EUR 54 billion worth of public spending cuts as his government pushes to finalize a 2027 budget. The budget, which aims to cut the deficit to 5% of GDP, now awaits submission and parliamentary scrutiny, but “adoption is far from certain,” according to Charlotte de Montpellier, senior economist for France and Switzerland at ING.
“Without a parliamentary majority, the government must either negotiate enough support or resort to Article 49.3, at the risk of a no-confidence motion,” she adds, referring to a move that has befallen prior governments over budgetary disputes.
Indeed, markets expressed skepticism over the government’s ability to deliver on its latest fiscal plan, with OAT spreads rising following the announcement. Morningstar DBRS on Friday lowered the outlook on its AA rating for France to negative, saying the government is “failing to address fiscal imbalances.” Peers Fitch and S&P already reduced their France ratings to A+ last year, and Moody’s is set to review its own late next month.
“The key question will be whether the proposed adjustment is seen as credible, permanent and politically deliverable,” says Allier. “The forthcoming budget will incorporate assumptions for growth, inflation, tax revenues and interest costs. Investors will assess whether those assumptions are realistic and achievable.”
The Risk of Debt Market Contagion
The spike in French borrowing costs comes as governments globally are confronting ballooning debt levels and higher servicing costs, with the IMF on Tuesday calling on countries to take action. The scale of France’s debt burden, which currently stands around EUR 3.5 trillion, has also raised questions about the risk of a wider fallout within global bond markets.
The OAT-Bund spread has climbed higher for the past several years, as France has navigated ongoing political setbacks and five prime ministers in almost as many years. Since early 2026, the spread has widened by around 47% to 105 basis points, above that of previously riskier southern European countries, including Italy at 90 basis points and Greece at 76 basis points. The last time OAT-Bund spreads climbed above 100 basis points was at the height of the eurozone debt crisis in 2012, when the European Central Bank made its famous “whatever it takes” pledge.
However, Carmignac’s Allier describes the current situation as “significantly different,” with France’s issues largely idiosyncratic and unlikely to spark wider regional contagion. “At that time, the crisis was systemic and involved concerns about the future of the euro itself, including the possibility of redenomination and contagion through the banking system. The current move is primarily specific to France, with, for now, no serious discussion of a break-up of the euro area.”
French Bond Market Volatility Looks Set to Continue
Time, nevertheless, is not on France’s side. Alongside budget negotiations, it faces Senate elections next week. While unlikely to be a major market event in its own right, a strong showing for the country’s anti-establishment parties could indicate a shift in fiscal policy ahead of the May presidential elections. Analysts warn that spreads are therefore expected to remain volatile and under pressure well into 2027.
Fabien Mariéthoz, investment manager at Pictet Asset Management, says the firm turned cautious on French bonds amid 2024’s political turmoil, and reopened its short on the asset class again last month ahead of further anticipated fiscal and political upheaval. “[We] expect further pressure in the coming months, followed by some relief before year-end if a budget is secured,” he notes.
According to ING, OAT-Bund spreads could rise to 125 basis points in the coming months without meaningful developments either domestically or in the Middle East. Pictet suggests the spread could even hit 150 basis points ahead of the Presidential election if the economic backdrop remains weak. However, it says a more likely scenario would see spreads settling around 90-120 basis points, before narrowing back to 50-80 basis points by late next year, if a credible path toward greater stability and fiscal consolidation is established.
“We are focused on whether France can deliver a credible fiscal agreement without causing a sharper deterioration in growth. The increasingly polarized presidential race could also keep the risk premium elevated as investors assess the possibility of a more significant shift in fiscal policy after 2027,” says Aviva’s Matei.
The 10-year OAT-Bund spread will not be the only warning indicator of a loss of confidence ahead of the presidential race, according to Carmignac’s Allier. She cites shorter-maturity OATs, weaker demand at government bond auctions, deteriorating market liquidity, and a widening of French bank credit spreads among other measures worthy of close inspection.
“Even [presidential] candidates who are convinced of the need for fiscal consolidation must first win the election, which is difficult to do while campaigning on an explicit austerity program. Markets may therefore have several opportunities to put further pressure on French spreads, although this will not necessarily result in a one-way selloff,” says Allier.
