French bond yields are rising as the country’s fiscal situation looks increasingly precarious.
- France is struggling under a combination of vast debt, political instability and an inability to curb spending
- The 10-year bond yield is now at around 4.9%, up from 3.5% in June
- Opinions are divided on whether a crisis will materialise
French bonds have started to come under increasing pressure. At a time when most developed market bond yields are climbing, yields on French bonds have risen ahead of their peers. The combination of vast debt, political instability and an inability to curb spending has investors worried that France may be the next major debt crisis.
The picture doesn’t look good for the French. Their debt to GDP sits at 116%, the third-largest in the G7 after the US and Italy. At the same time, growth is stagnating. The country’s economy is expected to grow at 0.1% in the third quarter, after remaining flat in the second quarter and contracting in the first.
France’s spending problem is well-documented. The government has struggled to push through any curbs to the country’s generous social security system. Every attempt to cut spending is met with protests on the streets. A cost-cutting budget has been proposed by Prime Minister Sebastien Lecornu, but it is not yet clear that he can get it through a divided lower chamber. The 2026 budget only scraped through after Lecornu agreed to scrap a pensions overhaul.
Then there’s the political situation. The runners and riders are emerging for the presidential election next year. Populist contender Marine le Pen has been seeking to establish her economic credentials, but none of her ideas – cutting spending to the EU; withdrawing support for Ukraine – appear to address France’s central problem: that it pays too many people not to work.
The 10-year bond yield is now at around 4.9%, up from 3.5% in June. The country’s hedge funds appear to have been making hay and there have been hopes that when those trades unwind, the situation may improve. Opinions are divided on whether a crisis will materialise. Jason Pidcock, manager of the Jupiter Asian Income fund, says: “There will be a financial crisis in France over the next six to nine months. This will flip the interest rate story and put pressure on the euro. There will be a flight of capital from Europe.”
Others believe the country can swerve a crisis. Craig Veysey, manager of the Guinness Global Dynamic Bond fund, says: “We would need to see more dysfunctional markets. They are not moving in the right direction, or trying hard enough to grasp the nettle on spending. We see continued higher yields, but this is not the 2010s.”
The eurozone has learned from previous crises and contagion should be limited. There should not be a crisis in the banking sector if France starts to flag. However, it would put pressure on the rest of Europe and could weaken the currency. It is a risk to watch over the next six months.”
