French Yields Are Exceeding Italy’s in New Europe Bond Hierarchy
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Article Type
Insights
Topic
Opinion
Published
July 08, 2025
Read time
5 mins
Authors
Luca Ferramosca, CFA
Jordy Hermanns, CFA
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French five-year bonds are on the verge of becoming the highest-yielding in the euro region, surpassing Italian notes for the first time since 2005.

 

New Hierarchy in European Sovereign Bonds

In recent months, the risk premium (spread) between Italian and French government bonds has narrowed significantly, mainly due to a tightening of Italian spreads. Currently, French government bond yields with a 5-year maturity have surpassed those of Italy. This shift follows an earlier trend where Spanish, Portuguese, and Greek bond yields had already fallen below those of France.

 

These developments reflect two narratives:

Firstly, positive momentum in the periphery: countries like Spain, Portugal, Italy and Greece are benefiting from improved fiscal positions and stronger economic fundamentals, leading to declining yields and increased investor confidence.

Secondly, mounting pressure on France: French bonds are underperforming due to political gridlock and waning support for necessary fiscal reforms, raising concerns about the country’s medium-term fiscal trajectory.

 

Historically, France has occupied a central position in the eurozone sovereign bond landscape—situated between the ultra-safe northern countries and the higher-risk southern periphery. German bunds remain the benchmark, prized for their low risk and high liquidity. Other northern countries such as the Netherlands and Luxembourg also offer strong credit profiles, though their smaller market sizes limit their appeal somewhat.

 

In the aftermath of the financial crisis, southern European countries were viewed as riskier due to weaker fiscal and economic conditions, particularly during the Eurozone sovereign debt crisis. France was traditionally viewed as the middle ground—offering a credit profile and yields that sat between those of Germany and the southern periphery, while also benefiting from a large and liquid sovereign bond market.

 

However, this dynamic has shifted. Today, France and Italy offer similar yields on their sovereign bonds. It means French notes now trade at the highest yield of any major euro area borrower in some tenors, and second only to Latvia across the whole bloc. This evolving landscape underscores the importance of fiscal discipline and structural reform.

 

Despite these changes, overall spreads within the eurozone—including those of France—remain relatively low and stable. From a broader perspective, this is not a sign of systemic risk, but rather a reflection of relative movements within a stable market environment.

 

A scenario in which the ongoing convergence of core-periphery spreads is meaningfully challenged remains difficult to envisage. The recent de-escalation of tensions in the Middle East has eased concerns over a commodity-driven inflation shock. Meanwhile, Germany, once known for its fiscal conservatism, has launched a seismic expansionary budget to revive its stagnant economy and restore global competitiveness. This has contributed to the general tightening in spreads, as markets priced in a resurgence of term premia in the German market. Also, the increased issuance of euro supranational debt  is slowly moving the Eurozone towards a common debt union. This is likely to act as a mechanism that keeps intra-national spreads contained.

 

Zooming in on France

In recent years, political turbulence has typically triggered idiosyncratic widening in French government bond spreads relative to maturity-matched German equivalents. Despite the recent failed motion of no confidence brought forward by the Socialist Party, France’s fiscal trajectory remains challenging, and the parliament is highly fragmented.

 

Political tensions may resurface in September when François Bayrou presents the 2026 budget to parliament, potentially crystallizing risks around a call for snap elections.

 

Zooming in on Italy

At the other end of the spectrum, peripheral countries have recently outperformed core and semi-core peers, a trend supported by strong fundamental and technical backdrops across the southern bloc. This theme has been reinforced by recent credit rating and outlook upgrades.

 

A particularly notable and debated case is that of Italian BTPs, which have steadily tightened versus maturity-matched German bunds, reaching levels that historically signal turning points in investor sentiment toward Italian sovereign credit, and for some, evoke memories of past crises.

 

Unusually stable political conditions have characterized recent Italian politics, making it increasingly difficult to envision a disruptive scenario that could destabilize the current equilibrium. This stands in stark contrast to previous episodes of investor anxiety, such as during the 2018 M5S–Northern League coalition or the 2022 rise of Fratelli d’Italia.

 

A proxy for redenomination risk, the ISDA basis (the spread between the 5-year 2014 and 2003 Italy CDS) has remained contained. Beyond the political backdrop, GDP growth is projected to maintain its upward momentum, partly due to stock-flow adjustments linked to the Superbonus scheme. Progress has also been made on the budget deficit and primary balance. Italy is now the only country in the EGB complex where the weighted average yield on debt is below the average coupon on the outstanding debt.

 

A key driver of the compression in sovereign spreads versus core countries is the robust and resilient demand for Italian debt. Bank of Italy data shows strong household participation, with retail issuance by the DMO contributing to a favorable technical picture. Domestic households and foreign investors accounted for around 50% of net BTP supply in 2023 and 2024. Additionally, the ongoing de-dollarization narrative could further support EUR-denominated assets, particularly those sovereigns benefiting from growth momentum, improving fiscal outlooks, and political stability, which have helped reverse years of investor skepticism.

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Authors

Luca Ferramosca
Portfolio Manager

Luca Ferramosca, CFA, is a portfolio manager with a focus on sovereigns. Prior to his current role, he worked as an institutional sales analyst at Aegon AM. 

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Jordy Hermanns, CFA
Portfolio Manager

Jordy Hermanns, CFA, is a portfolio manager in the multi-asset group and serves as an investment strategist in the asset allocation team.

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