French bonds open steady, yield on Nov. 2035 note at 3.48%

French bonds open steady, yield on Nov. 2035 note at 3.48%

French government bonds opened steady on Monday, with the yield on the November 2035 note at 3.48%. This level is relatively stable compared to the recent volatility in French financial markets, which have been significantly impacted by the ongoing political crisis.

The French government's collapse, following a no-confidence vote that ousted Prime Minister François Bayrou, has thrown the country into a new political crisis. This instability has led to increased economic uncertainty and geopolitical tensions, potentially affecting investor sentiment and market stability [1].

The yield on French bonds has been a reflection of the political turmoil. In the first quarter of 2025, France's public debt surged to €3.345 trillion, or 116% of GDP, driven by fiscal profligacy and economic stagnation [2]. The rising 10-year bond yields, now at 3.60%, have highlighted the fragility of the French economy and the risks of rating downgrades [2]. This uncertainty has triggered a selloff in French bonds, with yields climbing to levels not seen since the 2011 debt crisis.

The European Central Bank (ECB) faces a critical test in managing the fallout from France's political instability. The ECB's Transmission Protection Instrument (TPI) remains a theoretical backstop to curb excessive bond yield spreads, but its effectiveness hinges on France's compliance with EU fiscal rules—a condition increasingly at risk due to political paralysis [3]. Without decisive action, France's debt-to-GDP ratio could breach 120% by 2027, triggering a wave of credit rating downgrades from agencies like Fitch, Moody’s, and S&P [2].

Investors are recalibrating their risk management strategies in response to these developments. Diversification across jurisdictions with varying fiscal health, such as Italy, can mitigate exposure to French debt volatility [2]. Additionally, hedging tools like interest rate swaps and currency forwards may help offset potential losses from rising yields and euro depreciation [4]. Alternative assets, including equities and commodities, offer another layer of diversification, as noted by the EU Non-bank Financial Intermediation Risk Monitor [4].

As the ECB's tools and political will are tested, the coming months will determine whether Europe can avert a repeat of its 2011 crisis—or face a new era of fiscal instability.

References:

[1] https://search.yahoo.com/search?fr2=p:fp,m:tn,ct:all,kt:org,pg:1,stl:txt,b:&fr=fp-tts&p=French+Government+Collapse
[2] https://www.ainvest.com/news/france-debt-crisis-political-turmoil-implications-european-bond-markets-strategic-investment-considerations-2509/
[3] https://think.ing.com/articles/market-impact-of-french-political-turmoil/
[4] https://www.esrb.europa.eu/pub/nbfi/html/esrb.nbfi202509.en.html