• French 10-year bond yield surged past 5%, the highest since 2002, as political instability and budget uncertainty fuel a selloff.
  • The spread over German Bunds widened to 173 basis points, the widest since 2011, signaling heightened investor anxiety.
  • Investors sought safety in U.S. Treasuries, pushing yields down, while European credit stress rose to a near seven-month high.

A Perfect Storm

France’s bond market is under severe pressure, with the 10-year yield climbing to 5.142% on Wednesday, a level not seen in over two decades. The premium investors demand to hold French debt over German Bunds expanded to 173 basis points, the widest since the eurozone debt crisis in 2011. The selloff intensified as investors questioned whether a politically divided government can stabilize public finances while addressing widespread social unrest.

The central risk is a feedback loop: political paralysis raises borrowing costs, higher interest bills make deficit reduction harder, and spending restraint fuels further opposition. “The market is testing the government’s resolve,” said a Paris-based fixed-income strategist, who requested anonymity to speak candidly. “Without a credible fiscal anchor, the risk premium will keep widening.”

Budget Stalemate and Contagion Fears

Prime Minister Sébastien Lecornu’s minority government is struggling to pass the 2027 budget through a fragmented parliament ahead of next year’s presidential election. The difficulty is not merely agreeing on a deficit target; it is securing a politically durable combination of spending restraint and revenue measures. France is already under the European Union’s excessive-deficit procedure, with pressure to bring its deficit toward the bloc’s 3%-of-GDP reference level.

The turmoil has spilled into broader European credit markets, with the iTraxx Crossover index—a gauge of high-yield corporate credit risk—hitting 329 basis points, a nearly seven-month high. Meanwhile, safe-haven flows pushed U.S. 10-year Treasury yields down 7.3 basis points to 5.072%. “The move is clearly France-specific, but the worry is contagion,” said a London-based credit trader. “If the spread keeps widening, the ECB may be forced to act, but that’s not a given.”

Social Unrest Compounds Fiscal Woes

The bond selloff comes amid violent protests over the cost of living and deteriorating public services. Over the weekend, hundreds of thousands took to the streets, with clashes in major cities adding to investor anxiety about the government’s ability to implement a budget. France’s public debt stands at roughly 119% of GDP, and persistently elevated borrowing rates could push annual debt-servicing costs from 2.2% of GDP last year toward 4% by 2030, according to Reuters (TRI) commentary.

“What institutional investors like us are really focused on is regulatory stability,” said Andrea Valeri, Italy chairman at Blackstone (BX), speaking at a conference in Milan. “Italy has been on a steady growth trajectory, but France is now the outlier in terms of fiscal credibility.”

What to Watch

The immediate focus is on budget negotiations and a Moody’s (MCO) sovereign-rating decision scheduled for Friday. Ninety One (N91.L) has warned that failure to pass the 2027 budget could allow next year’s deficit to exceed 6% of GDP. Further demonstrations are planned for Saturday, and the scale of unrest could influence both political and market sentiment.

ECB intervention remains a contingency rather than a base case. ING (ING) economist Carsten Brzeski argues that contagion across several eurozone countries would make a stronger case for intervention than wider French spreads alone. For now, investors are left weighing the risk of a fiscal crisis against the potential for a last-minute political compromise.

Correction: An earlier version of this article misstated the iTraxx Crossover level as a direct measure of French sovereign risk. It tracks European corporate credit risk.