Key Takeaways
- • French 10-year yields rose more than any other G7 economy over the two weeks to 9 October, and on the Friday before that date France's 10-year borrowing costs exceeded Italy's by a record 30 basis points, reversing the usual pecking order.
- • Credit ratings are not driving the spread: S&P rates France A+ with a stable outlook and Italy BBB+ with a positive one, yet France pays more to borrow, according to the author's analysis.
- • France carries a debt burden of 117.6% of GDP and a deficit of 5.4% of GDP; a draft budget would cut the deficit to 5% in 2027 but has not yet passed a fragmented parliament.
- • Political uncertainty ahead of France's April presidential election, where the far right and far left could face off, adds a risk premium, per Man Group's Kristina Hooper.
- • Investors are differentiating among sovereigns rather than pricing a 2010-style crisis, though Man Group expects yields to keep trending upward and will monitor signs of stress in some investment grade bonds.
Summary
After the US bond rout spilled into the eurozone two weeks before 9 October, sending yields higher from Paris to Athens, fears of another sovereign debt crisis briefly resurfaced. Kristina Hooper, Chief Market Strategist at Man Group, argues that current market behavior looks more like differentiation than contagion. Over the two weeks to 9 October, French 10-year yields rose more than those of any other G7 economy, while yields in the UK, US and Italy also gained and those in Germany, Japan and Canada fell, led by Germany. Bloomberg data cited in the piece show that French yields rose almost twice as much as UK yields.
The pricing reflects a reversal in the traditional eurozone hierarchy. On the Friday before 9 October, France's 10-year borrowing costs topped Italy's by a record 30 basis points. Years of fiscal consolidation have improved Italy's standing, and S&P rates France A+ with a stable outlook and Italy BBB+ with a positive one, yet France pays more. Before the selloff that began at the start of the US-Iran war in February, spreads of Greece, Italy, Spain and Portugal over German bonds had reached multi-year lows, while France's barely narrowed. Hooper concludes that markets are weighing political dysfunction and the direction of fiscal travel alongside current fiscal positions.
France's debt burden of 117.6% of GDP shows no sign of falling, and investors are marking the country down for a stubbornly high deficit. Political uncertainty ahead of next April's presidential election, which could pit the far right against the far left, adds to the premium. France still borrows more cheaply than the US and UK despite the UK running a smaller deficit, which Hooper attributes largely to lost credibility since former Prime Minister Liz Truss's 2022 mini-budget and years of political turmoil, including seven prime ministers in ten years.
A draft budget published earlier in October would reduce France's deficit from 5.4% of GDP to 5% in 2027, but it has not passed, and investors doubt it can clear a fragmented parliament. Eurozone finance ministers and the European Central Bank pressed France last week to pass it and made clear no eurozone institution will bail out the bloc's second-largest economy. Even Marine Le Pen has pledged significant spending cuts if elected. Reports suggest France may issue more shorter-dated debt, which typically costs less but requires more frequent refinancing, a material consideration given plans to sell a record €340 billion of bonds in 2027.
Hooper notes that shifting to shorter maturities would not be unusual, since the US Treasury has relied on short-dated borrowing for several years. She also highlights France's access to deep capital markets, which distinguishes it from peripheral sovereigns during the eurozone crisis, and notes that many emerging market sovereigns are in far better fiscal shape than in 2010. Her conclusion is that there is no cause for alarm yet, but Man Group will follow the situation closely given signs of greater stress in some investment grade bonds.
The pricing reflects a reversal in the traditional eurozone hierarchy. On the Friday before 9 October, France's 10-year borrowing costs topped Italy's by a record 30 basis points. Years of fiscal consolidation have improved Italy's standing, and S&P rates France A+ with a stable outlook and Italy BBB+ with a positive one, yet France pays more. Before the selloff that began at the start of the US-Iran war in February, spreads of Greece, Italy, Spain and Portugal over German bonds had reached multi-year lows, while France's barely narrowed. Hooper concludes that markets are weighing political dysfunction and the direction of fiscal travel alongside current fiscal positions.
France's debt burden of 117.6% of GDP shows no sign of falling, and investors are marking the country down for a stubbornly high deficit. Political uncertainty ahead of next April's presidential election, which could pit the far right against the far left, adds to the premium. France still borrows more cheaply than the US and UK despite the UK running a smaller deficit, which Hooper attributes largely to lost credibility since former Prime Minister Liz Truss's 2022 mini-budget and years of political turmoil, including seven prime ministers in ten years.
A draft budget published earlier in October would reduce France's deficit from 5.4% of GDP to 5% in 2027, but it has not passed, and investors doubt it can clear a fragmented parliament. Eurozone finance ministers and the European Central Bank pressed France last week to pass it and made clear no eurozone institution will bail out the bloc's second-largest economy. Even Marine Le Pen has pledged significant spending cuts if elected. Reports suggest France may issue more shorter-dated debt, which typically costs less but requires more frequent refinancing, a material consideration given plans to sell a record €340 billion of bonds in 2027.
Hooper notes that shifting to shorter maturities would not be unusual, since the US Treasury has relied on short-dated borrowing for several years. She also highlights France's access to deep capital markets, which distinguishes it from peripheral sovereigns during the eurozone crisis, and notes that many emerging market sovereigns are in far better fiscal shape than in 2010. Her conclusion is that there is no cause for alarm yet, but Man Group will follow the situation closely given signs of greater stress in some investment grade bonds.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.