French Bond Spread Widens Again With Markets on Edge Before Vote

French bonds fell, widening the yield premium over German peers to fresh highs, as investors remain on edge ahead of upcoming legislative elections.

The 10-year yield spread over German securities rose to 83 basis points, the highest level since 2012 on a closing basis. The move unwinds a relief rally this week, and comes as leaders of France’s three biggest political groups prepare for a televised debate later Thursday.

President Emmanuel Macron called a snap election after his party was crushed in the European Parliament ballot earlier this month, sending markets into a tailspin. Investors’ main fear is that the new government will drive the country deeper into debt. 

Most polls show the far-right National Rally leading the race, with the alliance of the left in second place and Macron’s centrist group trailing in the third spot. The first round takes place on Sunday, with a second vote following on July 7.

“The market is probably adding a bit of premium because of RN’s possible absolute majority,” said Theophile Legrand, a strategist at Natixis, citing recent polls. That would lead to larger fiscal risks, he said.

The moves were compounded by comments from German Finance Minister Christian Lindner, who said his country would object to the European Central Bank intervening in the market if the election triggers a dangerous selloff in French bonds.

France’s deficit already exceeds what’s allowed under European Union rules and the International Monetary Fund predicts it will remain at 5.3% of economic output this year, and well above the EU’s 3% limit in 2027. 

“Markets will be keen on what RN gives us on fiscal side at today’s debate,” said Pooja Kumra, rates strategist at Toronto Dominion.

With assistance from James Hirai and Greg Ritchie.

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