When the US bond rout spilled over into the eurozone two weeks ago, sending yields surging from Paris to Athens, it briefly revived fears of another sovereign debt crisis.

For now, thankfully, it doesn’t look like a rerun of 2010. Yes, there is always the risk of contagion, but what we’re actually seeing today is more akin to differentiation.

Note how last Friday France’s 10-year borrowing costs topped Italy’s by a record 30 basis points, a reversal of the usual pecking order, in which Italy is seen as the riskier of the two. But it looks like years of fiscal belt-tightening now make Italy look the safer bet. Over the two weeks to 9 October, among much whipsawing, French 10-year yields rose more than those of any other G7 economy. Yields in the UK, US and Italy also gained, while those in Germany, Japan and Canada fell, led by Germany.

Figure 1: French 10-year yields rose almost twice as much as UK yields

Source: Bloomberg, as at 9 October.

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Yields will probably keep rising

Given the dire global fiscal picture, we believe yields will probably keep trending upwards. But the rout has made investors more discerning, and the bond vigilantes, who sell the bonds of governments they don’t believe are fiscally responsible, are starting to flex their power.

Ratings show how far this goes. Credit rating agency S&P rates France A+ with a stable outlook and Italy BBB+ with a positive one, yet France pays more to borrow. Until the selloff that began at the start of the US-Iran war in February, the spreads of Greece, Italy, Spain and Portugal over German bonds had fallen to multi-year lows, while France’s barely narrowed. Both suggest markets are weighing the direction of travel and political dysfunction, as well as the current fiscal position.

A reckoning for France

French debt stress has been a long time coming. Investors are marking France down for a stubbornly high deficit and a debt burden of 117.6% of GDP that shows no sign of falling. Political uncertainty ahead of next April’s presidential election, which could pit the far right against the far left, adds to the premium.

That said, France still borrows more cheaply than the US and the UK. The gap with the US is easy to explain, since America runs the larger deficit relative to GDP. The UK is harder to square, because its deficit is smaller than France’s, yet its borrowing costs are higher. Much of the difference most likely reflects lost credibility since former Prime Minister Liz Truss’s 2022 mini-budget, as well as years of political turmoil and seven prime ministers in 10 years.

Figure 2: France pays less than the UK despite a bigger deficit

Source: Bloomberg, as at 9 October. (IGV), normalised to 31 December 2025.

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Investors demand fiscal discipline

The outlook could improve if investors regain confidence in France’s commitment to fiscal discipline. A draft budget published earlier this month would cut the deficit from 5.4% of GDP to 5% in 2027, but it has yet to be passed, and investors question whether it could clear a fragmented parliament.

Eurozone finance ministers and the European Central Bank pressed France last week to pass it, and officials made clear that no eurozone institution is ready to step in and bail out the bloc's second largest economy. The onus was squarely put on French politicians. That means there will need to be broader political agreement that restraint is needed. Even far-right presidential challenger Marine Le Pen has pledged significant spending cuts if she were to win next April’s presidential election.

Pressure on the budget could also ease if France issues more shorter-dated debt, as reports suggest it may. Shorter maturities typically cost less to borrow but must be refinanced more often, which matters when France plans to sell a record €340 billion of bonds in 2027.

Shifting to shorter maturities?

A shift towards shorter maturities would not be unusual. The US Treasury has leaned more heavily on short-dated borrowing for several years, and emerging market governments have tended to shorten maturities when their finances were under strain.

It is also important to note that France has historically benefitted from access to deep capital markets, unlike peripheral sovereign borrowers, which was a significant contributor to their problems during the eurozone debt crisis. And many emerging market sovereigns are in far better fiscal shape than they were in 2010. In other words, there is no cause for alarm at this point, but we will follow this situation very closely, especially given signs of greater stress in some investment grade bonds.

All data Bloomberg, unless otherwise stated.

Author: Kristina Hooper, Chief Market Strategist, Man Group.