France overtakes Italy as Europe’s biggest bond risk

France has replaced Italy as the focal point for European bond market anxiety, a reversal that would have seemed improbable just a few years ago. The Financial Times reported this week that investors now view France as the biggest source of concern about European debt sustainability, with Italian 10-year government bonds trading at lower yields than their French equivalents for the first time in modern memory.mk+1

The French 10-year OAT yield stood at 4.09% as of August 25, with the spread over German Bunds at 85 basis points — near its widest levels of the year. That spread has become the market's preferred gauge of sovereign risk in the eurozone, taking over from the Italian BTP-Bund spread that long served that role.ideal-investisseur+1

A Tale of Two Fiscal Paths

The reversal reflects diverging fiscal trajectories. Italy's national debt-to-GDP ratio has fallen to 139% from 154% in 2020, according to the European Central Bank, and the country is running a primary fiscal surplus. Prime Minister Giorgia Meloni's government has won investor confidence through fiscal discipline and political stability.mk

France, meanwhile, has moved in the opposite direction. Its debt-to-GDP ratio has climbed to roughly 117-118%, with the fiscal deficit exceeding 5% of GDP. Reuters Thomson Reuters Corporation ↘ 4.69% noted in a recent commentary that France's debt load could rise to 130% of GDP by 2030 under current trends.reuters+1

Asset managers including Barings and Carmignac Gestion have been shifting out of French bonds and into Italian debt in recent months, according to Bloomberg.bloomberg

Political Uncertainty Deepens the Crisis

The fiscal picture is compounded by growing political risk ahead of France's presidential election in April-May 2027. Recent polls suggest a potential runoff between far-left leader Jean-Luc Mélenchon and far-right Marine Le Pen — a scenario that alarms investors on both sides.mk

Guy Miller, chief economist at Zurich Insurance Group, warned of the risk of OAT yields moving higher as the French government prepares to submit a draft budget to the National Assembly in the coming weeks.devdiscourse

A 'Perfect Storm'

Market analysts have described France's predicament as a "perfect storm" of low growth, fiscal deterioration, and political uncertainty erupting simultaneously. The American Enterprise Institute published an analysis in June warning that France appeared to be heading toward a sovereign debt crisis.aei+1

Foreign investors, including major Japanese holders who traditionally favored French government bonds, are rapidly reducing their exposure. The shift underscores a broader reassessment of where core sovereign risk resides in Europe — one that, if it becomes self-reinforcing, could challenge France's status as a pillar of eurozone stability.mk+1