Understanding the fiscal drivers of French sovereign bond yields
- 20 February 2025 (7 min read)
This paper presents a technical analysis on the relationship between fiscal deficits and bond yields in France. It is intended for an audience with an interest in macroeconomic research and fixed-income markets. This document also contains econometric analysis that support the reliability of our conclusions, although these sections are not mandatory for deriving the primary takeaways and investment implications.
Since the emergence of political uncertainty around July 2024’s snap parliamentary elections, the risk premium on the French bond market – reflected in the 10y spread relative to Germany – has unsurprisingly increased. Most recently, the government’s success in passing a 2025 budget bill has triggered some narrowing of the spread, though it remains above its pre-election level. In this paper, we aim to look beyond the political ‘noise’ to provide a fundamental, macroeconomically grounded evaluation of the French 10-year OAT fair value against a background of a deteriorating fiscal outlook.
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