France is now the place investors look to see whether the world's bond market is about to crack.
The 10-year French yield stood at about 4.94% on Thursday morning, up eight basis points on the day. The risk premium over German Bunds hovered near 141 points. French government bonds have lost 4.6% for investors this year. A fresh jump in oil, after a report that the White House is weighing options for another strike on Iran, pushed Brent back above $104 and triggered a new round of selling in bonds and stocks.
The oddest data point is in credit. Almost €215 billion of French corporate bonds now trade as if they were safer than the government's own paper. That is an almost 18-fold rise since the start of the year. Investors are crowding into multinationals such as L'Oréal and away from Paris. The stress is spreading to banks: the Stoxx 600 bank index has had its biggest two-day drop since March, and Société Générale has lost a quarter of its market value in two months.
Finance Minister Roland Lescure, in London, brushed it off. "There's no issue whatsoever," he told the BBC. Buyers want French paper, he said, "but they want it more expensive than they did". Which is another way of describing the problem.
Euro-area finance ministers met in Luxembourg on Thursday afternoon, with the bond sell-off hanging over the room. They were expected to send a message to France, which risks failing to pass its 2027 budget, and to Italy, which wants to run a larger deficit. Some investors have been buying Italian bonds on a bet that contagion fears are overdone. Others are waiting.
Back in France, the budget is stuck. Prime Minister Sébastien Lecornu's government has proposed €43 billion of new savings, and its fate depends on a divided parliament. Student protests have run for days, with more than 6,500 people arrested, most of them minors. Lecornu said his policy answer will come only at the end of the month.
On Tuesday, Le Pen set out her own numbers. Her plan would take the deficit to 3.7% of GDP next year, against the government's 5%, and down to 2.2% by 2032, with about €140 billion in net savings over the period. She also proposed a referendum on a constitutional "golden rule" forcing the deficit down by at least half a point of GDP a year until debt returns to 60%. French debt is about 119% of GDP.
Markets liked it, briefly. The 10-year yield fell 14 basis points to 4.72% that day. It has since given the gains back.
Some of the content is stranger than the headline. Le Pen asks the European Central Bank to bring down borrowing costs once "France takes back control", wants to cap France's net contribution to the EU budget at €5 billion, and backs a pan-European tobacco tax. Writing in the Financial Times, Martin Sandbu said the numbers "add up", while warning that the plan is no more credible than any politician's promise. Erwann Tison of L'Institut de l'Entreprise called it unrealistic, pointing to its tax cuts and its reliance on fraud reduction and lower immigration.
France has a bond problem and an election problem, and each feeds the other. The government cannot pass a budget, the opposition can promise a plan it will not have to deliver until 2027, and investors are pricing the gap between them. The presidential vote is on 18 April and 2 May 2027.
"The moment the general public understands the issue is the moment you buy the bonds," said Elliot Hentov of State Street Investment Management. By that test, Paris still has a way to go. A credible 2027 budget before the end of the year is the one thing that could turn 5% yields from a warning into a bargain. Watch Lecornu's answer at the end of the month, the budget vote itself, and whether the corporate-over-state gap keeps widening.
