France’s five red flags

FRENCH markets are heading into October with investors keeping a close eye on five pressure points, as concerns over high government debt, political gridlock and a looming presidential election threaten to keep the country’s financial assets under strain.

French bond spreads, futures positioning, equities, credit-default swaps and the euro are all flashing signs of growing investor unease, according to a Reuters report, and these developments could make it harder for the government to rein in its already stretched finances as markets look ahead to the 2027 presidential election.

Widening spread

The most obvious warning signal is the widening gap between French and German 10-year government borrowing costs.

The spread, which reflects the risk premium investors demand to hold French debt over German bonds, has risen above 110 basis points (bps), its highest level since the euro-zone debt crisis in 2012.

The speed of the move has caught markets off guard. Barclays had said in late August that a rise above 100 bps was unlikely this year and represented an “ugly” scenario for France.

John Thornton, head of fixed income at Keyridge Asset Management, says France was particularly exposed given the combination of high debt, large deficits and uncertainty over central bank policy.

“When we talk about some countries’ high debt, high deficits and central bank challenges around policy, France is probably one of the more uniquely exposed,” he tells Reuters.

Thornton, who is “underweight” French bonds, says he could reduce his exposure further. He sees the spread potentially reaching 200 basis points, although such a level could eventually attract buyers because of the higher yields available on French debt.

The European Central Bank (ECB) has tools that could be used if a euro zone member’s bond yields spirals out of control. Analysts, however, see little likelihood of those measures being needed for France now.

More stress

Investors are also expressing their concerns through futures on French government bonds, known as OATs.

These highly liquid contracts allow traders to take long or short positions without having to buy or borrow the underlying bonds. That makes them a useful way of positioning for further market moves.

“Some investors are clearly positioning for further France-specific stress,” says Theophile Legrand, rates strategist at French bank Natixis, pointing to investors shorting OAT futures.

Legrand also cautions in the Reuters report that OAT futures are widely used to position for broader government bond market moves, meaning the recent weakness is not entirely a France-specific bet. Part of the decline reflects the wider global bond selloff.

Still, political risk is likely to remain an important factor. The 2027 presidential election is already looming on the horizon, with analysts warning that a potential run-off between far-right leader Marine Le Pen and far-left politician Jean-Luc Melenchon could hit French markets hard.

Another risk is a further downgrade in France’s credit rating. Scope downgraded the country last month, while Moody’s could follow as early as late October.

Sluggish stocks

French equities are another pressure point. The country’s stock market is down about 0.5% this year, compared with a roughly 8% gain for broader European markets.

That underperformance comes as France’s economic outlook also looks weaker, with the Organisation for Economic Cooperation and Development expecting the economy to grow just 0.4% in 2026, against 1% for the broader euro zone.

Banks are feeling the pressure as political uncertainty and concerns over government debt weigh on sentiment.

French corporate bond issuance is also attracting scrutiny. Alex Temple, a senior portfolio manager at Allspring Global Investments, says domestic-focused financial companies were struggling.

“We have seen domestically focused names struggle a bit – smaller banks and insurers, they have underperformed,” he tells Reuters.

Rising cost

Another measure on investors’ radar is the cost of insuring French government debt against default.

Five-year French credit default swaps (CDS), which provide a hedge against rising credit risk, have climbed to about 52 bps, their highest since April 2017, according to LSEG data cited by Reuters, as at time of publication.

At that level, it costs about 52 US cents a year to insure every US$100 of French bonds. While that remains well below the record of more than 110 bps reached during the 2012 euro-zone crisis, the cost has doubled in just six months.

More tellingly, French CDS have risen 25 bps in the past three months. Italian CDS have increased by about 13 bps, while German CDS have barely moved.

Credit risk is also spreading into the banking sector. CDS for BNP Paribas, Societe Generale and Credit Agricole have reached their highest levels since April 2025, while the wider European bank CDS index is only at three-month highs.

Weaker euro

The euro is the fifth area to watch as investors assess France’s fiscal and economic pressures.

The currency has slipped even as euro-zone bond yields have risen.

Normally, higher yields can support a currency by making its assets more attractive, but a weaker euro alongside higher yields can instead point to concerns about economic growth and investor confidence.

For France, a weaker currency could add to fiscal pressure by making imported goods and energy more expensive.

Markets are currently pricing in at least three interest-rate increases by April, although some ECB policymakers have pushed back against aggressive expectations.

Brock Weimer, an analyst in investment strategy at Edward Jones, says three hikes appeared too aggressive given the weakness in the economy.

“Three (hikes) from here seems perhaps a bit aggressive,” he tells Reuters.

“The central bank is unlikely to take the risk of tightening into an economy that does not have a lot of steam behind it,” he is quoted as saying.