Key Points

• French borrowing costs rise to the highest level since 2002
• The yield spread between French and German government bonds has widened to levels seen during the crisis period.
• Rising debt costs make France's proposed 2027 budget even more complex

As investors demand higher compensation for holding French government bonds with increasingly high risks, the borrowing costs for the French government have risen to their highest level in 24 years. The yield on the benchmark 10-year government bond climbed to 5.142% on October 22.

On Friday, October 23rd, the yield fell back to around 5.04%, but concerns about France's fiscal prospects continued to suppress the European bond market. The premium of French 10-year government bonds over German 10-year government bonds widened to 177 basis points on Thursday, the highest level since 2011.

On October 21st, France for the first time surpassed the 5% mark, recording the highest borrowing costs since July 2002. Subsequent further increases have made the divergence between French and German government bonds even more pronounced.

Why has the yield on French government bonds risen?

French government bonds have been sold off, reflecting the combined effects of weak public finances, political uncertainty, and broader pressures stemming from rising global interest rates.

According to data from the French Ministry of Finance, the government debt as a proportion of GDP is expected to reach 119.3% in 2026 and rise to 121.7% in 2027.

At the same time, the French government expects this year's budget deficit to reach 5.4%, which is significantly higher than the EU's reference threshold of 3%.

The continuously expanding fiscal deficit has already affected the foreign exchange market. Previously, concerns regarding French debt had led to an appreciation of the Swiss franc against the euro, as investors turned to relatively safer assets.

France is still working hard to gain parliamentary support for its 2027 budget, which includes new fiscal measures amounting to 43 billion euros.

At the same time, broader selling in the global bond market further exacerbated the pressure, as high energy prices made it more difficult for central banks around the world to control inflation.

French debt costs are rising faster than those of Germany.

The gap in borrowing costs between France and Germany has become a particularly important signal.

On Friday, the yield on 10-year French government bonds was about 170 basis points higher than that of German bonds, down from a peak of 177 basis points on Thursday.

Investors use this interest rate differential to measure how much additional compensation is required to hold French government bonds compared to holding German government bonds.

Higher borrowing costs may also affect mortgage rates, corporate financing, and government spending, although these effects will gradually become apparent as existing debt matures and is refinanced.

France's financing needs make this process particularly important.

The French government debt management agency plans to issue around 340 billion euros in medium- and long-term bonds in 2027, while the overall interest expenditure of the public sector is expected to rise from 79.2 billion euros this year to 91.2 billion euros next year.

Will the French bond issue spread to Europe?

The immediate concern is not that France has defaulted or lost its ability to finance through financial markets, but rather that persistently high interest rates may undermine its efforts to stabilize government debt.

French government bonds are also weakening compared to other European sovereign bonds, continuing the regional divergence that has been highlighted by the recent decline in the euro.

At the same time, if bond market volatility further intensifies, the European Central Bank will face a difficult decision on how to respond.

The weakening economic prospects in France add another layer of complexity. The preliminary figures for the October Purchasing Managers Index (PMI) indicate a contraction in business activity, with the composite index falling from 51.1 in September to 48.4.

Maya Bennett

Maya Bennett is a financial journalist who has reported on cryptocurrencies, stocks, and broader market trends. Her work focuses on Bitcoin, major digital assets, the stock market, monetary policy, as well as economic developments that influence investor sentiment. She is adept at transforming rapidly changing market events into clear and concise reports.