Social unrest, political instability and mounting national debt weighed on French assets on Monday, with government bonds and Paris-listed stocks under pressure.
The euro was last seen down 0.15% against the U.S. dollar, and was 0.1% lower against the British pound.
The French 10-year bond yield jumped more than 10 basis points, taking it just shy of its highest level in decades. Higher yields represent higher borrowing costs for the government in the debt market. The country’s 2-year and 30-year yields were up 6 basis points and 8 basis points, respectively.
Stocks are also feeling the heat, with the CAC 40 index down 1.7% in afternoon deals on Monday. The market has significantly underperformed its European peers in recent years as political volatility has mounted — despite only around 15% of its revenues being generated domestically — with banks under particular pressure.
The French stock market is historically sensitive to any widening in the so-called “OAT-Bund spread”, the extra bond yield France pays over Germany, which has hit the highest level since the European Sovereign Debt Crisis of the early 2010s. French yields now also surpass those of Italy or Greece, implying higher risk.
Widening bond spreads raise concerns about the cost for companies to raise capital and heighten fears of higher taxes and tighter regulation. The French stock market has also struggled due to the dominance of its luxury firms, which are suffering from a downturn in high-end Chinese consumer spending.
‘The bond markets riot or the people riot’
Hundreds of thousands of people marched over the weekend in protest over political paralysis, the cost of living and the state of public services, including schools and healthcare.
Mass gatherings in cities from Paris to Lyon and Marseille spilled into dramatic scenes of buildings and cars set on fire, clashes with police and more than 2,000 arrests.
“If you’re an international investor thinking about whether you want to invest in French bonds, it’s not helpful,” Mike Bell, head of market strategy at RBC BlueBay Asset Management, told CNBC’s “Squawk Box Europe” on Monday.
“It looks like either the bond markets riot, or the people riot, or both,” Bell said.
Overseas investors hold a growing share of French debt, rising from around 48% at the start of 2022 to nearly 60% at the start of 2026, potentially meaning higher volatility in the bond market in a risk-off environment.
“What’s needed in France is to get the fiscal position in order, they need to raise the retirement age — you can’t retire at 62 if the average person’s living to 84 — but if this is going on even before they start talking about that, then imagine what would happen on the streets of France if you tried to raise the retirement age to… I mean here in the U.K. it’s 68,” Bell added.
“It doesn’t make the country look that governable against a time when they need to be putting through hard choices.”
Budget challenge
France’s benchmark borrowing costs are touching their highest level since 2002, with investors demanding greater returns to lend to the government.
Key concerns include uncertainty over next year’s presidential election, in which far-right Marine Le Pen is topping many polls, and whether the minority government of Prime Minister Sébastien Lecornu can pass the 2027 budget currently under negotiation.
Budget negotiations are increasingly fraught in France and have toppled two of Lecornu’s recent predecessors in recent years.
Analysts say lenders want a credible fiscal-consolidation plan to keep France from being caught in a debt spiral: weak growth and a persistently high deficit-to-GDP ratio are pushing up bond yields, raising the government’s debt-servicing bill and widening the deficit further — which could drive borrowing costs higher still.
“It will be difficult to see the budget deficit come down without painful measures,” Sharon Bell, senior European equity strategist at Goldman Sachs, told CNBC’s “Squawk Box Europe” on Monday.
“Taxes could well go up for French businesses. I think taxes may generally go up in France, fiscal consolidation means you need to either spend less or tax more. Those things are very tricky.”
“Le Pen, who is riding high in the polls at the moment, she’s talked about keeping a Golden Budget [rule] during her term, but she’s not really detailed how that would happen,” Bell continued.
“One of the reasons that OAT-Bund spreads are not coming in is because investors are skeptical that you will see any fiscal consolidation and a decline in that budget deficit.”
But Ken Egan, senior director of sovereigns at ratings agency KBRA, noted auctions last week showed there remains “still very solid underlying demand for French debt.”
“It is a more risk-off morning generally, but France is clearly taking a little more of the pressure… The question markets will be asking is how easily France can actually make progress from here,” Egan said by email.
Looming debt crisis?
Goldman Sachs’ Sharon Bell added that she did not believe current conditions warranted any emergency intervention by the European Central Bank, which “doesn’t want” to use tools such as its Transmission Protection Instrument.
However, she said if spreads start to disrupt market liquidity, the ECB would opt to use the mechanism.
Such a move would be politically sensitive, likely requiring France to engage in even more stringent fiscal reforms over a long period akin to those by countries such as Greece, Portugal and Ireland during the euro area crisis, she added.
“Sometimes it does take market pressure, and that’s what we’ve seen this year.”
RBC BlueBay Asset Management’s Mike Bell meanwhile said France was facing a “very real risk” of its own sovereign debt crisis.
“Ultimately they need to get the fiscal house in order. If you even suggested what’s actually needed for that, you wouldn’t get elected, and if you tried to put it in without having put it through on a mandate for election, then you’d have riots in the street.”
Before any intervention, there will be an “almighty clash between whoever wins the next election” and the ECB, Bell added. The central bank is unlikely to step in unless countries comply with its excess deficit procedure, which states that the general government budget deficit must not exceed 3% of GDP. France’s current deficit is around 5%.
Banque de France Governor Emmanuel Moulin told CNBC last week that rising French yields were due to political uncertainty, but said it was “possible to get back to a 3% deficit in 2029, which is the objective of the government.”
