French bonds are suffering through their worst decade since 1803 - and investors are bracing for more pain

By Nora Redmond

French bond turmoil is the worst since the 10-year period that included the Reign of Terror

A protester holds up a placard reading in French, "Tax the rich, not our future" during a demonstration by high-school students, joined by unions and teachers, demanding better learning conditions on Oct. 6, 2026.

France's massive budget deficit pushed borrowing costs to multidecade highs - and the moves were even more historic than that.

These historic movements in France are having an effect on bond markets around the world - including the U.S., say market observers.

"The rate of change of fiscal deterioration is accelerating and that's resulting in French debt being sold hard/yields rising, and these concerns are pulling European and global yields higher with it," said former New York Stock Exchange floor trader Tom Essaye, who authors the Sevens Report.

The epicenter of global market stress is France, added Krishna Guha, head of economics and central bank strategy at Evercore ISI.

The French budget deficit is set to reach 5.4% of gross domestic product this year, significantly higher than any other member of the European Union and above the bloc's 3% limit. The second-biggest economy in the EU has not managed to run a balanced budget since 1974, and with an aging population, pressure on the public purse is likely to increase. Also, since last month, students have led wide-scale protests demanding higher investment in the country's high schools.

Bond traders have considered all of this, with the spread between the yield on the French 10-year government bond BX:TMBMKFR-10Y and Germany's 10-year equivalent BX:TMBMKDE-10Y at about 1.4%, reaching toward a high last achieved in 2012.

But according to Jim Reid and Henry Allen at Deutsche Bank, the yield differential between the two actually widened to its largest during last week's turmoil since German reunification in 1990, according to available Bloomberg data dating back to the year.

The macroeconomic strategists also found that France's 10-year OATs have seen their worst decade for nominal returns in 223 years - at a time when the Reign of Terror, a particularly violent time during the French Revolution lasting from 1793 until 1794, was still included in 10-year rolling calculations.

At the same time, France's debt is rising. It's at EUR3.5 trillion, or $3.92 trillion. During the global financial crisis in 2008, the country's debt-to-GDP ratio was broadly the same as Germany's and considerably below Italy's.

"But today it's far above Germany's and closing in on Italy's," Reid and Allen wrote in a recent report. "Outside of the temporary Covid spike, Italian debt/GDP has been stable for over a decade."

Today, France has the highest bond yields compared with Germany, Italy and Spain, they said.

French stocks have also suffered, with its benchmark CAC 40 index FR:PX1 underperforming all of the major European indexes. Since the start of 2024, it's up just 4% versus Europe's STOXX 600 XX:SXXP rising more than 30% and Germany's DAX DX:DAX climbing over 50%.

Dhaval Joshi, a market strategist, said the France has a similar government debt to gross domestic product ratio as the U.S., but the debt of its private companies is much higher.

"With both maxed out, there's no easy way out," said Joshi. "The only question is how much more political pain to force the adjustment."

-Nora Redmond

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-08-26 0952ET