Election, inflation, and bond issuance triple pressure: French bond risk premium rises above 120 basis points

Zhitong Finance APP has learned that as investors prepare for possible political turmoil next year and the potential relaxation of fiscal constraints by a populist government, the key indicator measuring French bond risk has hit a new milestone. The extra yield of France’s 10-year government bonds over the safer German bunds rose above 120 basis points for the first time since 2012. This spread has surged sharply in recent weeks, with the latest increase coming after French inflation data exceeded expectations.

French Bonds Flash Red: Bund Spread Breaks 120 Basis Points

Marie Jacquot, CEO of Edmond de Rothschild Asset Management France, stated that this level is a “wake-up call for the bond market.”

Investors are nervous about next year’s French presidential election, as only seven months remain before voting and opposition parties remain unwilling to compromise with the outgoing Macron administration. According to a voting intention poll published this week, far-right candidate Marine Le Pen and far-left candidate Jean-Luc Mélenchon are expected to reach the runoff.

“With the rise in poll support for Mélenchon and Le Pen in the second round of the presidential election, the political risk implied in the spread is further intensifying,” said Théophile Legrand, rates strategist at Natixis.

On Wednesday, French bonds performed poorly. The latest inflation data showed France’s price growth in September accelerated to the fastest pace in more than two years, putting additional pressure on European Central Bank policymakers. Traders are betting on a third European Central Bank rate hike before the end of the year, and possibly up to three more hikes next year.

Macro strategist Skylar Montgomery Koning commented: “Supply-driven price pressures are squeezing real incomes and economic growth, while simultaneously pushing up rates and borrowing costs. This combination makes it even harder to stabilize an already difficult debt trajectory.”

France’s fiscal risks also remain under scrutiny. On Tuesday evening, the French debt management office announced plans to issue a record €340 billion ($386 billion) in medium- and long-term bonds next year (net of buybacks). The French government will release the 2027 budget on Thursday.

Due to a sharp slowdown in economic growth and a divided parliament resisting austerity measures, France has consistently struggled to rein in its out-of-control public finances. The fiscal deficit is expected to soar to about 5.4% of economic output in 2026, rather than narrowing slightly from 5.1% in 2025 as the government originally aimed for.

Rising Political and Fiscal Concerns: France May Become Europe’s “Weakest Link”

Political and fiscal turmoil have led French bonds to lag in the recent global sell-off. Over the past four months, the spread between French and German bonds has nearly doubled, with 120 basis points seen as a key psychological threshold. France’s long-term borrowing costs have also risen to the highest level since 2002.

French government bonds are also trading at a 22 basis point premium over Italian 10-year government bonds, the highest level since the eurozone was established. This marks a dramatic reversal of fortunes in the Italian bond market. In 2018, Italy suffered heavy investor sell-offs when a populist coalition government clashed with the European Commission over spending rules.

“We continue to choose to sell French government bonds and buy German government bonds, because the situation is likely to get worse before it gets better,” said Kevin Thozet, member of the Carmignac investment committee. “France is now being considered the weakest link in Europe.”