(Aug 18): Investors are turning bearish on French government bonds as politicians are ready for a fight over the 2027 budget before next year’s presidential election.
Trading in bond futures suggests investors have been placing new short positions in France’s debt, with the number of outstanding contracts on the 10-year tenor expiring next month jumping to the highest since early June, when it became the most active contract, according to data compiled by Bloomberg.
Bearish bets seem to have picked up throughout the summer, according to Barclays plc strategists led by Max Kitson.
“We’ll have a big election, a lot of political instability probably going into 2027,” said Marie-Anne Allier, a fixed-income manager at Carmignac Gestion who has bearish bets on intermediate-term French bonds against those of Germany, Italy and Spain. “You are in a dynamic that is very negative for France.”
Beginning in September, French Prime Minister Sebastien Lecornu will have to navigate a divided Parliament as his government prepares a 2027 budget aimed at bringing the deficit below 5%. He has warned that failure to reach an agreement could push adoption of a fiscal plan well into next year and send the deficit as high as 6.5%.
At the same time, candidates are positioning for the presidential election, which occurs in two rounds on April 18 and May 2.
Opinion polls show far-right populist Marine Le Pen leading in the race to succeed Emmanuel Macron and her growing popularity could make it harder for Lecornu’s government to secure support for fiscal restraint. On the far left, candidate Jean-Luc Melenchon has proposed increased spending and cancelling some of the nation’s debt held by the central bank.
The French 30-year yield surged 12 basis points Friday and ticked up again this week to about 4.90%, the highest since 2008. The yield premium that investors demand to hold French 10-year debt over German bunds has jumped to 85 basis points, the widest since October, indicating mounting pressure on France.
Natixis rates strategist Theophile Legrand said his index of idiosyncratic risk shows that around 25 basis points of the spread widening is attributable to such risk, “the highest since December 2025, during the budget-related tensions.”
There have been some clues about what the next budget could contain. Lecornu told Paris Match in July that he did not want to raise taxes. At the same time, the cost of the fires, heat and drought that have hit France this summer is emerging as another pressure on the public finances. In a letter to farmers over the weekend, he promised new measures in 2027 to support those affected.
Last month, Finance Minister Roland Lescure cut the government’s 2026 growth forecast to 0.7% from 0.9% and said the goal of reducing the deficit to 5% of gross domestic product, from 5.1% in 2025, now looks "difficult".
Niall Scanlon, a portfolio manager at Mediolanum, said he would want to see the 10-year spread with German bunds widen further before he starts buying French debt.
“If we trend towards the upper end of that 90 basis points, we might start dipping our toes in on France, overweight versus bunds at those levels,” Scanlon said.
France’s credit rating will also come under fresh scrutiny this fall, which could lead to increased bond volatility. The country’s debt agency expects decisions on its credit score beginning with Fitch Ratings on Aug 28, with other agencies to follow through the end of year. S&P Global Ratings, Morningstar DBRS and Fitch all downgraded French debt last fall as a series of weakened minority governments struggled to pass a budget. Moody’s Ratings cut its outlook.
Investors are “seeking to position for the upcoming domestic political catalysts,” the Barclays strategists wrote in an Aug 12 note, citing “most notably autumn’s budget-setting process and next April’s presidential election.”
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