Yields on 10-year French government bonds have reached 5% and a spread over German Bunds unseen since 2012. French banks are paying the price, especially on their AT1s.
Growing concerns linked to political, social and budgetary issues in France (rising public debt and deficits, the increasing polarisation of the country in the face of upcoming elections, and violent public demonstrations) mean that investors are worrying about the quality of French sovereign debt. This distrust is putting downward pressure on French government bonds (OATs).
OATs’ 10-year yields have risen from 3.9% to 5.0% in the space of just three months, whilst their spread over 10-year German Bunds now stands at 1.6% – the widest since 2012. In the face of a lack of political will to properly sort out budget deficits, it looks as if, in the short term, there is no way of improving the situation on the French bond market.
It is worth noting that some French firms can currently issue bonds that are cheaper than government debt. Although this phenomenon is somewhat rare in developed economies, it is much more widespread in some emerging countries. Indeed, French debt issuers such as Total and Air Liquide are partially protected from the tensions that are affecting French sovereign debt thanks to their geographical diversification as well as the solidity of their balance sheets and their economic models.
Meanwhile, French banks are being penalised by the close link that exists between the quality of their debt and that of the government despite their large size, the significant part of their business that is carried out abroad, and the solidity of their debt profiles. The yields demanded by foreign investors to hold debt issued by French banks are thus equally high, as they shadow the movements of government bonds. This is happening even though these institutions’ credit indicators and management remain solid. The most badly affected securities are additional tier 1 (AT1) debt, whose average annual yields are now exceeding 6% in euros and 8% in dollars.
Volatility set to continue
Another important point is that Fitch and Moody’s have decided to hold their ratings for France at A+ and Aa3, respectively, offering some respite to the French bond market in the short term. S&P is set to reassess its rating for France, which could see bond yields rise again if the agency downgrades the country.
The volatility seen on the French bond market will probably remain heightened over the coming months, as visibility is not improving on the political and budgetary fronts. Investors are also expecting credible steps from the government to reduce the deficit.
Against this backdrop, the rise in French bond yields should not be seen as an investment opportunity, but rather as a call for caution as regards French debt, especially AT1s, which might well be susceptible to a deterioration in the credit quality of the French government, despite banks’ solid management and robust balance sheets.
The opinions expressed herein are correct as at 6 November 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
