French bond yields near 2008 highs as debt and budget risks rise

France’s deteriorating public finances and political stalemate are becoming a growing concern for bond investors, with borrowing costs near financial crisis-era highs as another tough budget battle looms.

The European Union’s second-largest economy has endured recurring political instability and growing fiscal stress in recent years. It has repeatedly broken European Commission rules on budget deficits and debt limits, and successive prime ministers have been dismissed after failed attempts at reforms, spending cuts and tax increases to bring the situation under control.

France is subject to the EU’s excessive deficit procedure, and the Council recommends that it end its excessive deficit by 2029, but it has a long way to go.

The EU treaties establish reference values of 3% of GDP for public deficits and 60% for public debt. Last year, France’s deficit reached 5.1% of GDP, while the debt-to-GDP ratio exceeded 115%.

The IMF projected in July that France’s gross public debt would reach approximately 118.5% of GDP in 2026 and exceed 120% in 2027, remaining above that level until 2030.

At the same time, the economy is struggling to grow, contracting 0.2% quarter-on-quarter in the first three months of this year and stagnating in the second quarter.

The turmoil has caused acute stress in the country’s bond markets, with French government bond yields rising dramatically over the past year – exacerbated by the impact of the US-Iran war on borrowing costs around the world – giving France one of the highest government borrowing costs in the G7.

French 10-year government bond yields hit their highest level since 2008, above 4.13%, last week and held near 4.1% on Friday. Bond yields and prices move in opposite directions.

The French National Assembly is ideologically fractured, leading to no-confidence votes, the collapse of the government and stalemates over the national budget.

France is expected to present its 2027 budget plans to parliament in early October. Last year’s budget led to a deadlock that forced Prime Minister Sebastien Lecornu to pass the bill in Parliament after months of delays.

Lecornu became the fifth person to hold the position in just two years when he was appointed in 2025. His resignation just 27 days after taking office, he said political discord had made it too difficult to build a viable government programme. Lecornu was re-elected days after resigning.

Another source of uncertainty weighing on French bonds is the 2027 presidential election, where far-right candidate Marine Le Pen is currently the favorite to succeed Emmanuel Macron.

‘Poster child’ for debt problems

John Stopford, head of multi-asset income at Ninety One, told CNBC that rising deficits and slowing growth have become a global issue in the wake of the Covid-19 pandemic, wars and successive energy crises, but France “stands out”.

“It’s not just a French problem, but you could argue that, in many ways, France is one of the examples [countries]” he said in a call. “So I don’t think it’s unique to France. [but] “France’s public finances are going in the wrong direction.”

He said there is a broader challenge for developed governments: finding a way to balance their books and put debt on a more sustainable path. Failure to do so is likely to lead to a “bond market revolt” at some point, Stopford added.

“I can see why people are worried,” he said of France. “It’s not obvious how this will end well.”

The big uncertainty hanging over the OAT market is next year’s presidential election, Stopford said.

During a candidates debate on Thursday, Le Pen said the government “must drastically cut its spending,” adding that she was “extremely concerned” about the trajectory of Paris’ debt levels.

But Stopford told CNBC the market had been skeptical about whether Le Pen had much appetite to put public finances on a more sustainable footing.

“Clearly we can have a change of regime or policy priorities after May next year, but people doubt there will be much appetite for material fiscal consolidation,” he said. “So yes, I think we could be approaching a crisis. But I’m not sure it’s today.”

Théophile Legrand, rates strategist at Natixis CIB, told CNBC that his team already considers OATs to be “pre-stressed.”

“What could delay a recovery is not just domestic politics, but also the broader macroeconomic context,” he said. “The market does not expect France to return to a 3% deficit as soon as 2027, but is looking for signs that the 2027 budget is consistent with a credible medium-term path to stabilizing public debt. That path is increasingly difficult to achieve. The war-related context and higher long-term rates already complicate the fiscal equation, while this summer’s heat waves and wildfires add another layer of uncertainty.”

The final months of this year and the first quarter of 2027 were the most likely window for another bout of OAT volatility, Legrand added, as the budget debate and presidential dynamics become more closely intertwined.

“That said, we don’t expect a repeat of the 2024/2025 shock pattern. OAT valuations already look materially stressed: our fair value model suggests OATs are around 15 basis points cheap even before adding any policy premium, and our year-end forecast is around 75 basis points on the 10-year OAT-Bund spread if the budget passes, versus around 80 basis points if it doesn’t pass and France passes into a special budget law,” he said.

April LaRusse, chief investment specialist at Insight Investment, said that despite the increasingly gloomy headlines related to the French economy, there are “surprisingly few signs that France is preparing for the kind of fiscal tightening that its debt dynamics appear to require.”

“Growth expectations are being revised downwards, debt will continue to rise and bond yields are now at levels not seen since the financial crisis,” he said. “However, a significant spending squeeze remains politically difficult. With pension reform effectively suspended until after the 2027 election and parliament deeply fragmented, the government appears focused on maintaining political stability rather than addressing the underlying fiscal problem.”

The question for investors now, he said, is whether authorities can muster the political will to put public finances on a more sustainable path before market pressures intensify.

“French government bonds are already trading cheaper than their Italian equivalents, which would have been unthinkable not long ago, but they could become even cheaper in a negative scenario,” he said.