OAT of Control - French borrowing costs surge
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Article Type
BondTalk
Topic
Opinion
Published
October 07, 2025
Read time
4 mins
Authors
Colin Finlayson, CFA
Alexander Pelteshki, CFA
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French politics are once again rippling through bond markets. The resignation of Sébastien Lecornu and the unveiling of President Macron’s new cabinet have reignited concerns over France’s fiscal trajectory and political stability.

So why now? President Macron’s new cabinet, unveiled at the weekend, was seen by opposition parties as a continuity Government – more of the same – and it ignored their cries for change.  This made Lecornu’s chances of mobilising the already fractured coalition impossible in his eyes.

 

The result is a further jump in 10-year French OAT bond yields to 3.60%, and a widening of the10-year bond spread vs German bunds to almost 90bps – this is close to its highest level since the European Sovereign crisis.  In a sign of how times have changed, 10-year French Government Bonds now yield more than 10-year Italian BTP’s – but given the relative improvements in the Italian fiscal story and the ongoing fiscal mess in France, it is difficult to argue that markets are wrong in pricing them this way.

 

While the recent twists and turns in the French political story this year have had only a fleeting impact on financial markets, there is reason for additional caution today – this is because the prospect of fresh elections to find a new Prime Minister is growing ever likely. This could be seen as an attempt by Macron to “call the bluff” of the electorate and test their support of both the Left and the Right of French politics.   It’s a gamble which he has taken before. 

 

The real risk is that an unfavourable outcome for Macron could force him to call a Presidential election.  This is not something he would want to face at this time.  Even though it is a low probability outcome, it is the one that would have the biggest impact on the bond market… and it is more likely than it was before today’s resignation.

 

Lurking in the shadows is another risk.  Last month Fitch downgraded the French Sovereign to ‘A’, moving it even further from its historical position of AAA and closer to that of Spain, Italy and others.   With Moody’s scheduled to review their rating on the 24th of October and S&P a month later, there is a very real risk of both agencies also downgrading France to ‘A’.  This could lead to some forced selling by some institutional investors, who are unable to hold bonds below a certain ratings threshold.  It may cause a reduced level of demand from other investors – such as some Central Banks – who tend to shy away from assets with elevated levels of volatility.

 

Can this get worse before it gets better?  Yes - the spread vs Bunds could still move wider but the potential for an ECB “backstop” if markets become disorderly (and support more broadly from the EU), could mean that the extent of further relative underperformance may well be contained.  As a result, we used this spike in the OAT/Bund spread as an opportunity to take profits on our short 10-year France vs long 10yr Germany position in our Strategic Bond fund. 

 

As a source of uncertainty and risk to the market, it will continue to be a factor in the coming months - but without new negative developments, it may prove difficult to see meaningful underperformance from current levels.  We will be watching from the sidelines for now until a new catalyst emerges.

Disclaimer

Authors

Colin Finlayson, CFA
Portfolio Manager
Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.
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Alexander Pelteshki, CFA
Portfolio Manager
Alexander Pelteshki, portfolio manager, is a member of the investment grade and multi-sector portfolio management team. He specializes in top-down asset allocation, global strategic bond and global credit portfolios.
View profile
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