How do you like your OATs?

French OAT yields have risen dramatically – which unfortunately isn’t a comment about an abundance of breakfast cereal. Year-to-date, OAT-Bund [note1] spreads, the yield difference between the French and German bonds, has more than doubled since the start of June, gapping from c 60 basis-points c. 130 basis-points (bps), the highest since the European Debt Crisis. 

The immediate driver is fiscal arithmetic. Authorities [note2] announced they would miss their fiscal targets for 2026 and a revised plan [note3] projects the public deficit to reach 5.4% of GDP in 2026, before dropping to 5.0% in 2027; official projections expect an increase in debt-to-GDP to 121.7% in 2027. In a vacuum that is an undesirable outcome, but not one that would typically cause a c. 50bps spike in a month. 

Several things are happening concurrently:

1. France has presidential elections in 2027 which is injecting fiscal uncertainty
2. Material refinancing requirements
3. Macro forces pushing sovereign real yields higher broadly
4. Weak growth, raising concerns about debt sustainability

To understand the political uncertainty, one needs to know that French Presidential elections can have a maximum of two rounds, where if no candidate achieves an outright majority in the 1st round, the top two candidates have a runoff. In the 2017 and 2022 election Marine Le Pen, the far-right candidate, made it through to the 2nd round[note4] but failed to secure enough centrist votes to defeat the President Macron. 

Polling[note5] has Le Pen consistently in the lead in the 1st round, but recently there has been a surge of support for the far-left candidate, Jean-Luc Mélenchon. He now polls in 2nd or 3rd  place depending on whom the centrist bloc fields. Mélenchon sparked market concern with a quip[note6] that Banque de France’s should “throw it in the fire”; referring to the banks holdings of OATs; comments he has later clarified.[note7]  This has increased the implied probability of an extreme party taking the French presidency – and importantly leads to material policy uncertainty.

Regardless of who wins the Elysée, the market consensus is that fiscal reform will be a difficult task. France hasn’t had a balanced budget since 1974 and the IMF[note8] Real GDP growth estimate is 0.7% for 2026 growing to only 1.1% on their 5-year projection; weak growth reinforces concerns about a sovereign debt trap[note9]. 

There is also the pressing issue of needing to roll over circa. €380 billion [note10] of debt by the end of 2027. Higher yields mean debt must be refinanced at a higher rate – official estimates indicate debt service costs could increase by circa. €10 billion in 2027. 

We mustn’t forget that yields as well as spreads having widened, the benchmark German bunds at c. 3.5%, are nearly 100bps higher than they were in March this year which may cause investors to require a greater spread compensation all else equal.

Critically, France has not been locked out of the debt markets. The 15 October auction placed €13.25 billion [note11], at an aggregate bid-to-cover ratio of 2.28x. That implies there was plenty of demand for French paper, just at a price. 

Peripheral European markets like Italy and Greece have been making good progress in terms of fiscal reform: debt-to-GDP is at 138% and 136% respectively[note12], but the trend has been lower. Bond markets had rewarded their efforts: Italian BTP- and Greek- spreads have declined from c. 245bps and 320bps respectively in 2022 to lows of 58bps and 55bps in January 2026. 

Whilst France was the catalyst, there has been spread widening amongst some of the periphery of Europe. Italian and Greek spreads are notably wider, although both still yield less than OATs.

Currently this looks more like an idiosyncratic French issue than the start of another Eurozone Debt Crisis. That being said, it is important to remain cognisant about how contagion risk can potentially be self-fulfilling and the importance of sentiment. Italy also has ~16% of its outstanding stock to refinance in 2027 and having to refinance at higher rates risks applying stress on fiscal arithmetic. 

Concerns are also likely to weigh on the Euro as a currency: in 2010 the trade-weighted Euro fell [note13] c. 8.8% eventually declining c. 14% before the ECB began Outright Monetary Transactions (OMT) in July 2012. YTD trade weighted Euro is down c. 3.4% although that is a confluence of factors, including the effect of inflation and higher energy prices.

This may also adjust the reaction function from the ECB. The bank could make use of the TPI[note14] facility, a conditional bond buying program – although from the Italian experience after 2011 we know they would regularly allow spreads >200bps without intervening. France is also technically ineligible due to an Excessive Deficit Procedure and Christine Lagard[note15] has stated “The primary and first solution lies at home in France. And it has to do with fiscal policies.”. This is a reminder that the ECB remains aware of the lessons learned during the 2010 crisis of the threat to independent monetary policy from fiscal dominance, whereby inflation stability is subordinated to fiscal concerns.  

None the less there have been exceptions made in the past, such as Greece, if there is political will. It is also plausible that an indication from the ECB about the potential use of TPI would be enough to calm the bond market.

The rise in OAT spreads reflects largely idiosyncratic fiscal concerns and political uncertainty in France. Bond investors are not locking France out of capital markets but are repricing the risk. Currently, it doesn’t look like the start of a Eurozone crisis but contagion risk can become self-fulfilling if unchecked which is why the reaction function of the ECB will be important to observe.