By Harry Robertson, Amanda Cooper and Niket Nishant
LONDON, Sept 25 (Reuters) - French markets are under growing pressure from worries about high debt levels and political gridlock as next year's presidential election looms large.
Here's a look at a number of key metrics that started to flash, potentially further hampering the government's ability to rein in its groaning finances.
BOND YIELD SPREAD SURGES
The gap between French 10-year borrowing costs and their German equivalents, a measure of the risk
premium attached to French debt, has risen to its highest since the euro zone crisis in 2012, at more than 110 basis points.
The speed of the move has surprised markets. Barclays said in late August a rise above 100 bps was unlikely this year and constituted an “ugly” scenario for France.
“When we talk about some countries' high debt, high deficits, and central bank challenges around policy, France is probably one of the more uniquely exposed,” said John Thornton, head of fixed income at Keyridge Asset Management.
Thornton, who is “underweight” French bonds, said he could cut his exposure further. He said the spread could rise to 200 bps, but that level would likely trigger buying of French bonds due to the high yields on offer.
Ultimately, the European Central Bank has tools to prevent any euro zone member's bond yields from spiralling out of control, although analysts believe there is little chance the central bank would need to resort to those for France yet.
FUTURE STRESS
Traders have also expressed concerns through futures on French bonds, or OATs. They are highly liquid and allow traders to take a long or short position, without buying or borrowing the underlying bonds.
“Some investors are clearly positioning for further France-specific stress,” said Theophile Legrand, rates strategist at French bank Natixis, including by shorting – betting against – OAT futures.
He noted that many investors use OAT futures to take a position on broader debt markets and that much of the recent fall reflects the global bond selloff.
The 2027 presidential election is one looming risk.
Analysts said a run-off between the far-right's Marine Le Pen and the far-left's Jean-Luc Melenchon could hit French markets hard.
Another worry is the chance of further credit ratings downgrades. Ratings agency Scope downgraded France last Friday and Moody’s could follow suit in late October.
STOCKS AND BANKS LAG
France’s stock market, down 0.5% this year, has lagged broader European markets, up roughly 8%.
Economic growth is weaker, too, with the OECD expecting France to expand just 0.4% in 2026 compared with 1% in the broader euro zone.
Domestic banks have struggled in this environment given concerns about political uncertainty and high government debt.
Credit Agricole shares have risen just 1% this year and Societe Generale, 2%, while BNP Paribas has fallen in recent months but matched the 19% rise in the broader European STOXX banking index in 2026.
French corporate bond issuance has also come under some scrutiny, said Alex Temple, a senior portfolio manager at Allspring Global Investments.
"We have seen domestically focused names struggle a bit – smaller banks and insurers, they have underperformed," he said.
CREDIT RISKS MOUNT
The cost of insuring French sovereign debt against the risk of default has hit its highest in almost a decade, LSEG data shows.
Credit default swaps also offer bondholders a hedge against any increase in the risk of holding that debt.
With bond yields rising everywhere, CDS have risen for most sovereigns, but the speed at which they have risen for France is far greater than anywhere else.
French five-year CDS trade around 52 basis points, the most since April 2017. That means it costs $0.52 annually to insure every $100 held in French bonds. That's a far cry from the record highs above 110 bps in 2012, but double what it was six months ago.
In the last three months alone, French CDS have risen 25 bps, while Italian CDS are up around 13 bps, against very little change in Germany.
CDS for French banks, like BNP Paribas, Societe Generale, or Credit Agricole have hit their highest since April 2025, while a broader index of European bank CDS is only at three-month highs.
EURO GLOOM DEEPENS
The weaker euro could compound the government's fiscal problems, by making imported goods and energy more expensive.
The euro has fallen below $1.14 to three-month lows, while euro zone bond yields have risen – something that in theory supports the currency if investors are not concerned about growth. A falling currency and rising yields typically reflect heightened investor unease.
Traders currently anticipate at least three rate increases by April, but fewer-than-expected hikes could weaken the currency further.
Some European Central Bank policymakers have sought to temper aggressive market expectations for rate hikes.
"Three (hikes) from here seems perhaps a bit aggressive," said Brock Weimer, analyst, investment strategy, at investment firm Edward Jones.
"The central bank is unlikely to take the risk of tightening into an economy that does not have a lot of steam behind it."
(Reporting by Harry Robertson, Amanda Cooper and Niket Nishant; Editing by Dhara Ranasinghe and Alex Richardson)
