French bonds are suffering through its 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 October 6, 2026.

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

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 country has not managed to run a balanced budget since 1974, and with an aging population, pressures on the public purse of the second-biggest economy in the European Union look set to increase. Also, since last month, students have led wide-scale protests demanding higher investment into the country's high schools.

Bond traders have taken all of this into account, 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 in available Bloomberg data dating back to German reunification in 1990.

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 period 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 also rising, having hit 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 to 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%.

-Nora Redmond

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10-08-26 0532ET