Budget crisis compounded by looming elections! Political risk premiums continue to rise, and French government bonds are being hunted by short sellers.

As French politicians prepare for a fierce battle over the 2027 budget and with next year's presidential election approaching, investors are increasingly turning bearish on French government bonds. Data from bond futures trading shows that investors are establishing new short positions in French government bondsthe number of open contracts for the French 10-year bond futures expiring next year has surged to its highest level since early June. This contract has been the most actively traded French government bond futures since early June. The Barclays strategist team led by Mark Kitcson noted that bearish bets on French government bonds have seemed to increase throughout the summer. In a report on August 12, the bank's strategists wrote that investors are "seeking to position themselves ahead of upcoming domestic political catalysts," among which "the budgetary process this fall and the presidential election in April next year are particularly noteworthy." Marie-Anne Alie, fixed-income fund manager at Carmignac Gestion, pointed out, "We will have an election, and there will likely be a lot of political instability before 2027. You are in a dynamically adverse environment for France." She is currently shorting medium-term French government bonds while going long on German, Italian, and Spanish bonds. With the autumn budget approaching, Prime Minister Sbastien Lecornu will have to contend with a divided parliament while crafting the 2027 budget, aiming to reduce the fiscal deficit to below 5%. He warned that if no agreement is reached, the approval of the financial plan may be delayed until late next year, which could push the fiscal deficit rate up to 6.5%. Meanwhile, various candidates are positioning themselves for next year's presidential election, which will take place in two rounds on April 18 and May 2, 2027. Polls indicate that far-right populist figure Marine Le Pen is currently leading in the presidential race. Le Pen's rising support could make it more difficult for the Lecornu government to garner backing for austerity measures. On the far left, candidate Jean-Luc Mlenchon has proposed increasing spending and canceling some government debt held by the French central bank. The yield on French 30-year government bonds soared by 12 basis points last Friday, rising slightly again on Monday to 4.86%, marking the highest level since 2008. The premium on yields demanded by investors for French 10-year government bonds compared to German bonds soared to 84 basis points last Friday, the highest level since October of last year, indicating increasing pressure on French government bonds. The political risk premium in France has widened the spread between French and German government bond yields, according to Tho Legrand, a rates strategist at Banque de France. He stated that about 25 basis points of the widening can be attributed to this specific risk, "which is the highest level since the budget-related tensions of December 2025." There are already some clues about what the next budget might contain. In a July interview, Lecornu indicated that he does not wish to raise taxes. Meanwhile, the losses caused by forest fires, heatwaves, and droughts that swept through France this summer are becoming another pressure on public finances. In a letter to farmers over the weekend, Lecornu promised to introduce new measures by 2027 to support those impacted. Last month, French Finance Minister Roland Lescure lowered the government's forecast for economic growth in 2026 from 0.9% to 0.7%, stating that the goal of reducing the fiscal deficit from 5.1% in 2025 to 5% now seems "very challenging." Neil Scanlon, a portfolio manager at Mediolanum, noted that he wants to see the spread between French 10-year government bonds and German government bonds widen further before beginning to buy French bonds. Scanlon remarked, "If this spread approaches the upper limit of 90 basis points, we might start to buy French bonds in small amounts, overweighting at that level relative to German bonds." This fall, France's credit rating will also come under close scrutiny, which could lead to increased volatility in the bond market. Last fall, due to the difficulties of a minority government in passing a budget, S&P Global Ratings, Morningstar DBRS, and Fitch Ratings all downgraded France's debt rating. Moody's changed its outlook on France's rating to negative. The French Debt Management Office expects various ratings agencies to begin announcing their credit rating decisions for France starting August 28, with assessments from other agencies continuing until the end of the year.