French bond market hides a "time bomb"? Foreign ownership share nears a decade high; capital flight could worsen market turmoil.

Title context: French bond market hides a "time bomb"? Foreign ownership share nears a decade high; capital flight could worsen market turmoil. Text: The French debt market's heavy reliance on foreign investors is raising concerns, as this factor could become another trigger for market volatility. According to data from documents submitted by the Bank of France, among major European countries, France has one of the highest proportions of its debt held by overseas investors, with non-residents holding about 60% of the total French debt, close to the highest level in the past decade. Foreign buyers occupy an important position in the French debt market The proportion of French debt held by foreign investors is far higher than in other major developed countries. At the end of June, non-residents held about 34% of the total UK gilts. As of the end of 2025, the proportion of US Treasuries held by non-residents was about 31%. In August, foreign investors held close to 37% of Italian government bonds. As of March, the proportion of Japanese government bonds held by foreign investors was only 13%. Research conducted by the Bank for International Settlements shows that foreign investors often take a long time to increase their holdings of a country's debt, but when the market comes under pressure, they may sell these bonds quickly. The Organisation for Economic Co-operation and Development (OECD), in a global debt report released earlier this year, pointed out that the heavy participation of foreign investors, especially hedge funds, could lead to concentration of risk and trigger "deleveraging and rapid capital outflows," thereby turning "market volatility into higher financing costs." French government bonds have traditionally been favored by global investors because of their good liquidity, relative stability, and the extra yield they offer over German government bonds (often regarded as Europe's safest asset). However, over the past month, the French market has been hit by the country's huge debt burden and cost-of-living protests that have escalated into violent clashes. The yield on French 10-year government bonds is hovering near 5%, and the yield spread of French government bonds over German government bonds has recently widened to the highest level in more than 15 years. France's long-term debt premium soars At present, there are plenty of alternative investment options with higher yields in other markets, and these markets are not facing the kind of fiscal and political turmoil that France is experiencing. Luca Cazzulani, head of strategy research at UniCredit, said: "France's reliance on foreign demand could become one of the sources of its vulnerability." He noted that non-resident holders "still have plenty of room to further reduce their holdings of French bonds, and this should be regarded as a risk factor." The experiences of Greece and the UK show what can happen to a market when foreign investors flee. According to data compiled by the Bruegel think tank, in 2007, about 74% of Greece's debt was held by non-residents. As the severity of the country's fiscal problems gradually became apparent, by 2011 that proportion had plunged to below 40%. In 2022, within two months after former UK Prime Minister Liz Truss proposed an unfunded tax-cutting plan, foreign investors sold a record 29 billion (about $34.8 billion) worth of UK gilts. Because data on bond holdings usually lag, tracking investor positions is not easy. However, analysts are closely watching Japan, one of France's largest foreign creditors, for signs that investors are pulling out. As Japanese government bond yields approach historic highs, the market widely expects funds to be repatriated to Japan for investment. Shinji Kuniibe of Sumitomo Mitsui DS Asset Management said earlier this month that funds under its global fixed income team had sold all of their French government bond holdings. France's domestic absorption capacity is insufficient Meanwhile, bond traders said that from what they have observed, few domestic institutional investors in France appear to be stepping in to take up bonds. At the end of the second quarter, French insurers and banks held 9.2% and 10.5% of total French debt, respectively, far below previous levels. Konstantin Veit, who manages European interest rate portfolios at Pacific Investment Management Company (PIMCO), said that if demand for new debt issuance begins to show signs of weakness, French authorities may encourage domestic banks to buy government bonds. Veit said: "The main problem France faces is that it must regularly enter the market to raise funds. If something goes wrong in a government bond auction, then the authorities could indeed make phone calls asking banks to step in and take up the bonds." French households might help fill the government's financing gap. However, although France's average savings rate is far higher than the EU average, the country still lacks a sizable retail investor base for bonds. By contrast, in recent years the Italian government has been working to re-expand the scale of retail holdings of its government bonds, because household investors tend to hold their investments for longer. This year, France's fiscal deficit ratio (the difference between fiscal expenditure and revenue as a share of GDP) is expected to reach 5.4%, far exceeding the EU's 3% cap. At the same time, the French government must not only finance the huge deficit but also bear an increasingly heavy interest burden on its debt, further pushing up the debt ratio. The sell-off in French government bonds earlier this month reflected market concerns about its fiscal position. The root cause of France's debt problem lies in long-term fiscal deficits. For years, the French government has been accustomed to responding to economic and social crises by expanding public spending, but the huge welfare system makes spending cuts face enormous resistance, and two prime ministers have been forced out as a result. For decades, France's fiscal spending has consistently exceeded revenue, and 2024 failed to reverse this situation. According to the draft 2027 budget published on October 1, the French government plans to implement about 54 billion in fiscal consolidation measures, involving areas such as pensions, healthcare, and public spending, with the goal of reducing the fiscal deficit ratio to 5%. However, Riccardo Bellesia, an economist at Intesa Sanpaolo, pointed out: "Even if France achieves its 5% fiscal deficit target, its debt scale will still continue to rise. Its weak point is who will provide the funding for this debt."