Debt, budget uncertainty... France under pressure as 10-year rate nears 2008 peak

Franco-German spread reaches highest level since 2012

The yield on the French ten-year bond is hovering near the peak of 4.86% recorded in July 2008. At the same time, the spread between the French ten-year OAT and the German Bund has significantly widened, reaching a level not seen since 2012. However, it remains well below the record of 2.251 points reached on November 17, 2011, at the height of the eurozone sovereign debt crisis.

For bond investors, this spread measures the additional compensation demanded for holding French debt instead of German debt. The current tension combines a component specific to France, linked to budgetary and political uncertainties, with a more general movement of rising bond yields. A sustained increase in rates gradually raises the cost at which the government finances its new issues and refinances maturing debt.

2027 Budget Presented Amid a Fragmented Parliamentary Landscape

The draft budgets for the State and Social Security for 2027 are set to be examined today in the Council of Ministers before being submitted to Parliament. Their adoption seems challenging in the absence of a majority in the National Assembly. Prime Minister Sébastien Lecornu warned about the financial consequences of prolonged instability, stating that « reality is catching up with us. »

Meanwhile, the government is trying to seek compromises with various political forces ahead of the budget review. On the social accounts side, Labor Minister Jean-Pierre Farandou indicated that the executive plans to « almost halve » the Social Security deficit in 2027, with a goal of bringing it down to around 12 to 13 billion euros, compared to approximately 22 billion expected in 2026. This trajectory will be closely watched by investors, as French public finances and the 2027 presidential deadline raise questions about sovereign risk.

3% Inflation Complicates the Macroeconomic Equation

The rise in financing costs comes as French inflation picks up again. According to the provisional estimate published by INSEE, consumer prices rose by 3.0% year-on-year in September, after a 2.4% increase in August. This acceleration takes place in a context of a general rise in yields and helps keep market attention focused on the future trajectory of interest rates.

For the investor, the combination of higher inflation and an expanded Franco-German spread alters the arbitration between French and German bonds. This backdrop adds to other mixed signals on the real French economy, between the dynamism of certain segments like the automobile market, which increased by 11.6% in September, and occasional industrial challenges faced by several manufacturers.