28 Oct 2026
Source: Bloomberg as at 9 October 2026.
For context, that is a level only ever seen once before, in 2011 during European sovereign debt crisis. Back then, the threat was existential: the break-up of Europe. This time, the trigger is far less clear-cut.
In my view, there was no single catalyst behind the scale of OAT underperformance. Instead, French bonds were caught in a perfect storm that turned the market on its head.
The backdrop is familiar. France has a weak fiscal position and a fractured political system, while its budget deficit has climbed above 5% and their debt to GDP is ballooning.
Source: Bloomberg as at 9 September 2026.
None of this is new and the real reckoning was expected next year, ahead of the spring presidential election—but the market had other ideas. Another attempt to pass the budget, combined with a strong showing by the left-wing LFI party in recent opinion polls, brought France’s challenges sharply back into focus.
The “known unknowns” around France had not stopped investors piling into OATs in recent years. Japanese investors, in particular, have been major buyers. But with JGB yields rising to multi-year highs, reports suggest that some large Japanese holders have begun selling.
At the other end of the market, hedge funds have been unwinding leveraged carry trades in French rates. As funding costs rose and positions sank further underwater, these supposedly “low-risk” trades were closed out aggressively.
And, as ever, selling begets more selling. Both groups of sellers were hit by the same force: higher yields. Look closely and a clear thread connects the conflict in Iran, tougher talk from central banks, and the OAT blow-up: higher interest rates.
That is the new twist in this story. When the cost of money rises, the economics of once-attractive trades can change fast. France’s fiscal failings of course remain at the heart of the story, but crowded positioning and leverage have turbocharged the fallout.
It is no coincidence that risk appetite in corporate bonds has also faded—first in French banks, then more broadly. Higher yields and borrowing costs are becoming a real threat to heavily leveraged businesses and interest rate-sensitive sectors.
This episode has reinforced our view: that generic credit-market beta looks overvalued and vulnerable. And in this environment, bottom-up security selection is far more compelling.
France’s twin problems—fiscal weakness and political risk—are not going away. The current level of borrowing costs can quickly become a real problem for the French Government, with any signs of fiscal discipline looking remote. And without another sharp bout of widening, the ECB is unlikely to step in support the market.
Instead, expect verbal support first, as they try to calm the market but without actually buying any bonds. French bonds are undoubtedly cheaper. But cheap, on its own, is not a reason enough to buy. And given the real problems that they face, maybe this is one that's best to watch from the sidelines.