Insight Uncommon truths: Too soon to buy French bonds

The spread on French bonds versus Germany has widened to what would normally be considered an attractive level. However, budgetary problems and the risk of a post-election deterioration in French-EU relations, suggests it may be too soon to buy. 

Something’s afoot in France: presidential elections are six months away; the government is again struggling to get its budget through parliament and popular unrest is again being voiced by students. Oh, and financial markets are acting as a barometer for the political and economic storms, with yield spreads versus Germany climbing to levels not seen since the Eurozone crisis of 2011/12. So, is this a buying opportunity or the moment that French yields permanently disassociate themselves from those of neighbouring Germany? 

During a recent trip to France, I didn’t see any sign of the student riots, neither in countryside towns, nor in the centre of Paris. However, it is clear that life has been made more difficult by the rise in food and energy costs and the rise in interest rates. The climb in long yields shown in Figure 1a is feeding through to the rates on new mortgages (which tend to be long-term and fixed). In the space of five years, French 10-year yields have gone from below zero to just below 5% (and the 30-year yield is 5.4%). 

France is not alone, with Figure 1a showing that 10-year yields have risen in much of the developed world, with most of the damage done in 2022/23 as central banks normalised their policies. The further steep gains during recent months may have been particularly sharp in France but were not limited to that country. 

Within the Eurozone, the focus is usually on spreads versus Germany and Figure 1b is revealing (the UK is included for purposes of comparison). First, spreads are nowhere near the highs seen in Spain and Italy during 2011/12. Nevertheless, spreads have widened in recent months, particularly in France where the 10-year spread recently touched 150 basis points (it was 138 bps on 9 October 2026). It is easy to forget that the OAT-Bund spread was often around zero, and sometimes negative, in the early 2000s.

That was a period when French government debt/GDP was in line with that of Germany (see Figure 2a). However, French government debt has since climbed as a percent of GDP, while that of Germany has been broadly stable. Among the countries shown in Figure 2a, France has seen the biggest deterioration in its debt ratio since the start of this century. In my opinion, this explains the rise in French yields relative to those of Germany, Italy and Spain (though the UK has also suffered). Even worse, the rise in French yields may now be impacting those of Italy and Spain. 

Unfortunately, the fiscal situation remains difficult. The French government forecasts that a budget deficit/GDP ratio of 5.4% in 2026 will be followed by 5.0% in 2027 (giving a debt/GDP ratio of 121.7%). However, it is proving difficult to push the 2027 budget through parliament (as has been the case in recent years). Even worse, the budget watchdog (the High Council of Public Finance) has criticised the “optimistic” economic assumptions underpinning the budget arithmetic. 

I think this budgetary deadlock was the catalyst for the recent widening of spreads. However, it is my view that the budget will eventually be adopted, if only because the government can impose it on parliament by using Article 49.3 (this could briefly narrow the spread, in my view). Such a manoeuvre brings the risk of a vote of confidence (and legislative elections) but the proximity of presidential elections suggests to me that it is in nobody’s interest to trigger parliamentary elections. Nor do I think it is in the interests of serious presidential candidates to create financial chaos. 

As suggested by Figure 2b, our calculations suggest that France is on a precarious long-term debt trajectory (assuming no radical change in budgetary policy). The same applies to the UK and the US, with the outcomes worsened if bond yields continue to rise (if unaccompanied by stronger GDP growth). This highlights the importance of getting to grips with the budgetary problems in France and elsewhere.

Which brings us neatly to the other factor causing investor unrest: the 2027 presidential election due on 18 April, with a second round on 2 May. Opinion polls suggest that Marine Le Pen will win the first round of votes, but that she will fall short of outright victory at that stage (polls suggests she will gather around one-third of the vote). Those same opinion polls also suggest that she will win the second round, though the margin of victory depends on the opponent in that two horse race. The most likely candidates to face her in the second round appear to be former PM (and centre-right candidate) Édouard Philippe and Jean-Luc Mélenchon of the far-left La France Insoumise party. Of the two, Philippe looks to have the better chance in the second round, but I think Le Pen remains the favourite (though a lot can change in six months). 

Markets could be worried about a Le Pen presidency for a number of reasons. First, the promise of tax cuts that could worsen the budget deficit (though she suggests spending and the deficit will be cut). Second, the relationship with the EU could be damaged by the expected demand to cut the French contribution to the EU budget. Finally, Le Pen is threatening an immediate referendum to change the constitution to limit immigration, restrict who can become a French citizen and curtail what non-nationals can do within France. Essentially, French law would supersede EU law, which could put France on a collision course with other member countries, and perhaps trigger further spread widening (the place of France within the EU and the Eurozone could be questioned, as might the incentive for the ECB to help control spreads). 

On the other hand, I believe a victory for Édouard Philippe could be more reassuring for markets, though the ability of the next president to implement their policies will depend upon the outcome of legislative elections that I expect to be called for June/July 2027. There remains the risk of a divided parliament, with no clear majority for any party, thus prolonging the current gridlock (and period of wide spreads). 

There are scenarios that could avoid budgetary gridlock and bring a narrowing of spreads after the presidential and parliamentary elections (for example, a Philippe presidency supported by a centrist majority). However, gridlock is possible, no matter who is president. Even worse, a Le Pen presidency could cause further widening of the spread if France is put on a collision course with the EU. I believe the spread has reached an attractive level, but I can see credible routes to further widening. It may be too soon to buy. 

Unless stated otherwise, all data as of 9 October 2026. 

Investment risks 

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.