For the first time since the dot-com bust, investors are demanding more than 5% annual return to hold French government debt. The yield on the OAT, France's benchmark 10-year bond, crossed that threshold on Wednesday, a stark signal of the market's growing discomfort with the country's fiscal trajectory.
The move caps weeks of steady selling, driven by political gridlock in Paris over the 2027 budget. Prime Minister Sébastien Lecornu is pushing for €43 billion in spending cuts, but without a parliamentary majority, the path to approval is far from certain. Even if the budget passes, it would only bring the deficit down to 5% of GDP next year—well above the 3% ceiling that EU member states are supposed to respect.
Debt at 120% of GDP
France's public debt now stands at roughly 120% of GDP, one of the highest ratios in the eurozone and double the EU's 60% guideline. That burden, combined with political instability, has made investors increasingly wary. The yield on the OAT is not just a number for bond traders; it serves as a benchmark for a wide range of lending rates across the French economy. A sustained rise could translate into higher borrowing costs for businesses and households, potentially dampening investment and consumption.
The spread between French and German 10-year yields—a key measure of perceived credit risk—has widened to nearly 160 basis points. Germany's Bund remains the eurozone's safe-haven benchmark, and the growing gap underscores how far France's fiscal credibility has slipped in the eyes of global investors.
The bond sell-off adds pressure on the government ahead of a decision by Moody's, the ratings agency, on France's sovereign credit rating, expected on Friday. Most economists anticipate a downgrade, which would automatically raise the government's borrowing costs further. A downgrade would also ripple through the broader European bond market, potentially affecting other highly indebted member states.
France is not alone in facing fiscal strain. Across the continent, governments are grappling with post-pandemic debt and the costs of the energy transition. But France's situation is particularly acute because of its political fragmentation. The government's inability to command a majority in the National Assembly has made it difficult to implement the kind of structural reforms that markets want to see.
The current turmoil is reminiscent of the market jitters seen during recent unrest, when French bonds also came under pressure. That episode, linked to riots in several cities, highlighted how quickly investor sentiment can turn when political and social tensions converge.
For now, the government is trying to reassure markets that it can deliver on its fiscal promises. But with no majority, every step of the budget process is a battle. The outcome of the Moody's review will be a critical test of whether France can weather the storm without losing its investment-grade status.
If the downgrade materialises, it would be a symbolic blow for a country that has long been considered a pillar of European stability. It would also complicate the European Central Bank's efforts to manage inflation and growth across the eurozone, as higher French yields could spill over into other peripheral markets.
The coming days will be crucial. Investors will be watching both the Moody's decision and the parliamentary debate on the budget. In the meantime, the 5% yield threshold serves as a reminder that even core European economies are not immune to the discipline of the bond market.
