France's Bond Risk Premium Tops 100 Basis Points for First Time Since 2012

France's cost of borrowing relative to Germany climbed past a full percentage point on Friday, the first time the premium on its 10-year bonds has exceeded 100 basis points since 2012, when the future of the euro was itself in doubt. The spread reached 104 basis points as investors demanded greater compensation to hold French debt.

The move caps a steady widening: the gap has doubled since a snap election in 2024 produced a fractured parliament, making it far harder to rein in a budget deficit that ranks among the euro zone's largest. French yields have also climbed faster than those of any other developed economy during the recent global bond selloff, which has been driven by rising energy prices and renewed inflation concerns.

Paris is attempting to bring the deficit down from 5.4% of output this year to 5% next year through €54 billion in spending cuts. Opposition parties are expected to contest those measures in the coming months, a fight that could topple the government. Lower-than-expected growth means this year's original 5% target will already be missed, and costlier energy, tied to the Middle East conflict, has led investors to bet on further European Central Bank rate increases, threatening growth further.

Politics adds to the pressure. Next year's presidential election could disrupt deficit-reduction efforts, with the far-right's Marine Le Pen and the far-left's Jean-Luc Melenchon leading the field. Melenchon's suggestion that the French central bank cancel the government debt it holds has unsettled investors, while Le Pen, who leads the polls, wants to lower the retirement age for some workers, a step that would strain public finances. Italy's spread has also widened, but by much less than France's 40-basis-point rise since June.

For the government, the higher premium means costlier new borrowing and mounting debt-servicing bills, already its largest budget expense as it refinances hundreds of billions in COVID-era debt issued at ultra-low rates. Debt-servicing costs are projected to exceed expectations by €4.5 billion this year and by a further €10 billion next year. Economists warn of a snowball effect in which borrowing costs spiral unless France posts a primary surplus, a goal it remains far from.

The signal is notable because France's bond market is the euro zone's largest and has long been treated as a relatively safe asset. France now pays a higher premium than Italy, despite Italy carrying more debt and lower credit ratings. Many investors say they are reluctant to favour French bonds. "France has real problems, and that they're not going to be solved anytime soon," said David Zahn, head of European fixed income at Franklin Templeton.

Some analysts see limited room for a further near-term rise given the scale of the move. Chris Jeffery, head of macro strategy at L&G, recently closed a position betting against French bonds, arguing that at some point investors must judge whether they are being adequately compensated for sovereign risk. Still, further political uncertainty could widen the spread, for instance if the government falls and leaves France without a budget, or if Melenchon and Le Pen meet in a presidential runoff. Societe Generale has not ruled out a move to 120 basis points.