Rathbones Greenbank Global Sustainable Bond Fund Manager Stuart Chilvers examines why France is proving the latest flashpoint in this year’s government bond volatility and explains how this could open up attractive opportunities in French banks and insurers.
Credit markets have generally been very well behaved in 2026. There was volatility in March given events in the Middle East, and relentless supply from the AI hyperscalers has seen these issuers’ spreads widen meaningfully over the year.
But on the whole, credit spreads have stayed in a fairly tight range, aided in no small part by the elevated level of yields overall, which has generated strong investor demand.
Unfortunately, government bond markets have proved more volatile. Rising energy costs driven by the Middle East conflict, ongoing concerns about fiscal sustainability in several countries and a significant revision to interest rate expectations in many countries have all played a part.
That revision reflects steeper energy costs, inflation staying stubbornly above target in some areas and more resilient growth than expected given the macroeconomic backdrop.
It has felt like a bout of volatility in government bond markets has always been just around the corner this year. As such, it’s perhaps not surprising that it’s government bond market moves that have driven credit spreads wider (and to their widest point of the year in Euro credit).
France in the hot seat
The French government bond (OAT) market has been very much the centre of attention for bond investors over the last couple of weeks. What’s catalysed the spike in OAT yields is up for debate. In all likelihood, it’s down to a combination of factors:
- The move higher in yields globally following September’s Federal Open Market Committee (FOMC) meeting. That focused investor minds on which countries this surge would pressure most. France falls firmly into that camp given its meagre nominal growth.
- The French budget, and whether it can pass given opposition parties are unlikely to support unpopular measures ahead of the presidential election in April 2027, along with the fiscal slippage implications for 2027 if it cannot.
- Recent opinion polls pointing towards an ever-dwindling likelihood that a centrist party can win next year’s election.
- The announcement of a record €340bn issuance plan for 2027.
The moves were likely exacerbated by market technicals, with hedge fund participation in bond markets and market leverage both having increased since COVID.
A timely reminder to government bond investors (if they needed one!) that significant changes in both supply and demand dynamics mean that a larger proportion of the buyer base has grown more yield-sensitive.
While contagion to other European government bond markets has generally been fairly limited so far (bar a couple of the weakest days), we have seen credit spreads in both French investment grade and high yield bonds move wider as the spread between OATs and Bunds has widened.
At the time of writing, we seem to have reached a short-term peak in the OAT-Bund spread, with a decent move tighter from intraday wides.
However, we are wary of calling this as the peak of the widening move: there’s still a long way to go until April’s presidential election and it’s hard to see France making any meaningful progress on fiscal consolidation before then as its parties weigh up the electoral implications of any measures they may support.
That said, the Rassemblement National will probably be wary of worsening the situation given it seems most likely to win the presidency and thereby inherit current difficulties. We would also caution against expecting the European Central Bank (ECB) to come to France’s rescue, except via verbal intervention.
There are technical obstacles that bar the ECB from deploying some of its potential toolkit (for example, its Transmission Protection Instrument is not meant to benefit a country mired in an excessive deficit procedure, as France is). And we have also seen wider spreads versus Bunds historically in other countries without the ECB taking action.
Opportunities in French banks and issuers?
All that said, we do think these market moves can create opportunities, particularly among French banks and insurers if sovereign stresses continue to weigh on French credit.
France’s banking and insurance sectors have understandably come under greater pressure than their counterparts elsewhere. Specifically, we are keeping a close eye on the valuations of the larger French banks with global businesses which generate a healthy portion of their revenues outside France.
It’s also worth noting that France’s banks own far fewer OATs as a percentage of their total assets, compared with Italian banks’ ownership of Italian government bonds (BTPs), for example. We will also be monitoring French insurers, which are relatively better insulated from the OAT moves than banks.
Of course, some of the move in credit valuations seems justified given recent OAT volatility. But if we reach a stressed environment where we feel investors are treating issuers with different fundamental exposures indiscriminately, we will look to take advantage in those names where we have conviction that this presents attractive valuation opportunities.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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