Many of you have likely seen the news that “French government bonds have plummeted.” I have organized what is happening in chronological order. Additionally, I will summarize the similarities and differences compared to the yen’s depreciation in Japan, as well as the positive and negative aspects brought about by this sharp decline.
What is actually happening?
A “sharp decline in government bonds” refers to the fact that the price of the bonds has fallen, and the yield (interest rate) has surged. The yield on France’s 10-year government bond was in the low 3% range at the beginning of 2026, but it temporarily exceeded 5% on October 1st. This is the highest level in about 24 years, since July 2002.
The CAC 40 stock index and the euro are also falling, creating a “triple decline” scenario where stocks, bonds, and currency are all being sold off simultaneously.
Chronological flow leading up to the sharp decline
February–March 2026: Still calm
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February: The 10-year bond yield was around 3.25%. The passage of the 2026 fiscal budget at the beginning of the year provided support.
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March: Crude oil prices rose due to escalating tensions in the Middle East. Concerns over inflation led to expectations of interest rate hikes by the ECB (European Central Bank), pushing yields to the 3.6–3.8% range. However, this was a rise in interest rates across Europe as a whole, not a problem unique to France.
September: Fiscal anxiety unique to France intensifies
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Mid-September: The 10-year bond yield reached an 18-year high.
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September 19: The French Ministry of Finance released its government debt outlook. The content, which showed the debt-to-GDP ratio hitting a record high of 119.3% in 2026 and 121.7% in 2027, ignited a sell-off of government bonds.
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Same period: Rating agency Scope downgraded France’s rating from AA- to A+. Morningstar DBRS also changed its outlook for the AA rating to “negative.” This year’s fiscal deficit is expected to expand to 5.4% of GDP.
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In the month of September alone, the yield rose by about 0.6%, the largest monthly increase since December 2022. Over the three months since the beginning of July, it rose by over 1.1%, the largest quarterly increase since 1987.
First week of October: Exceeding 5% (peak)
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October 1 (Thursday): The 2027 fiscal budget proposal was released. It was a strict austerity budget totaling 54 billion euros, aimed at curbing the fiscal deficit—which would reach 6.5% if left unchecked—to 5%. Even so, this does not mean debt will decrease; it only slows the pace of the increase. Furthermore, a record 340 billion euros in government bond issuance is planned for 2027. The market did not react favorably, and the yield temporarily exceeded 5%.
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October 2 (Friday): France’s fiscal watchdog pointed out that the budget’s economic assumptions were “optimistic.” The yield spread against German government bonds exceeded 1.5%, a level not seen since the end of 2011 during the European debt crisis.
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October 5 (Monday): The U.S. 10-year Treasury yield also reached 5.33%, its highest level since 2002. There were concerns that the anxiety originating in France would spill over into the U.S. market.
Recent: A temporary decline, followed by another rise
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October 6: Yields fell to 4.75% due to a reassessment that the “rise had been too rapid.”
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October 7: Yields rose again to over 4.85% due to fiscal concerns and caution regarding high crude oil prices.
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This week: The yield spread against Germany has widened again to around 1.42%.
*The figures for the yield spread against Germany vary between 1.27% and 1.5% depending on the report. This is due to differences in the timing of the measurements.
Why did the yield spread against German government bonds widen?
Since France and Germany both use the euro, currency exchange factors do not enter into the yield difference between the two countries. The spread represents the additional interest rate (risk premium) reflecting whether ‘lending money to France is riskier than to Germany’ almost directly.
Reasons why France was sold off
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High debt: The debt-to-GDP ratio is expected to exceed 119%, hitting a record high. The fiscal deficit is also in the 5% range.
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Credit downgrades: There have been successive downgrades by Scope and outlook revisions by DBRS.
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Massive issuance of government bonds: A record 340 billion euros are scheduled to be issued in 2027. As the supply increases, prices are prone to falling.
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Political instability: The ruling party, which advocates for austerity, is in conflict with the anti-austerity National Rally and the left. There is anxiety that the austerity path could be overturned in the 2027 presidential election.
Reasons why Germany was bought
Germany has a low debt ratio, holds a top-tier AAA rating, and is considered Europe’s “safe asset.” When anxiety spreads, money flees from France to Germany. In fact, on the day French yields rose, German yields fell, widening the spread from both sides. Furthermore, hedge funds increasing their short positions on French government bonds has amplified the movement.
Is the structure the same as Japan’s yen depreciation?
The structure where “government bonds are sold due to fiscal anxiety, and the currency is also sold” is common to both. However, where that anxiety manifests differs.
Similar movements occurred in Japan as well
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After the inauguration of the Takaichi administration in October 2025, the yen’s depreciation to 159 yen per dollar in January 2026 was almost linked to the decline in the price of Japan’s 30-year government bonds.
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The shift toward a stronger yen after the House of Representatives election on February 8 also coincided with a rebound in the prices of ultra-long-term bonds.
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In December 2025, government bonds were sold due to speculation regarding the scale of fiscal stimulus and increased bond issuance, with the 10-year bond yield hitting 2.1% for the first time since 1999.
The flow of “caution regarding budgets and increased bond issuance -> government bond selling -> currency depreciation” is very similar to the current situation in France.
The difference is in “how the anxiety manifests”
France: The currency is the euro (not its own national currency). The central bank, the ECB, cannot act solely for France. Therefore, the anxiety manifests clearly as the yield spread against Germany (= anxiety regarding repayment capacity).
Japan: The currency is its own yen. The Bank of Japan holds a massive amount of government bonds. It is unlikely to reach a state where it “might not be able to pay back,” so anxiety tends to flow toward yen depreciation (= concern over erosion due to inflation).
Furthermore, not all yen depreciation is due to fiscal instability. The expansion of the trade deficit in 2022–23 and the low level of Japan’s real interest rates from 2024 onward were major factors. The fact that Japan’s 10-year bond yield hit 2.93% in August 2026 (the highest in about 30 years) was also mainly due to expectations of interest rate hikes by the Bank of Japan and rising U.S. interest rates.
The “bad sides” and “good sides” of the French government bond plunge
Bad sides
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Increase in interest payment burden: France’s government bond interest payments are expected to swell to 91.2 billion euros. Since government bonds from the low-interest-rate era are being refinanced at high interest rates, the impact will take years to manifest.
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Rise in domestic borrowing rates: Because government bond yields serve as the benchmark for mortgage and corporate loan interest rates, this cools the economy.
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Declines in stocks and currency: A weaker euro creates inflationary pressure through higher prices for imported goods.
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Spillover to other countries: Selling has spread to government bonds of Southern European countries such as Italy, Spain, and Greece. This contributes to global interest rate hikes and indirectly puts upward pressure on Japanese interest rates as well.
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A vicious cycle that is hard to escape: If austerity is tightened, the economy worsens; if economic stimulus measures are taken, fiscal anxiety intensifies.
Good sides
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High yields for investors buying from now on: A yield of around 5% for 10-year bonds is a significant level compared to the near-zero interest rates of a few years ago. However, those who already hold them are sitting on unrealized losses due to the price drop.
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Market discipline: Rising interest rates become pressure that forces the government and politicians to pursue fiscal reconstruction.
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Benefits of a weaker euro: This is a tailwind for European export companies and the tourism industry.
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Lessons for other countries: It serves as a real-world example of how fiscal anxiety is priced by the market. It is not someone else’s problem for Japan, either.
Overall, this is a phase where the bad sides outweigh the good, and the benefits are limited to certain positions (investors buying now, export companies, etc.).
Summary
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The plunge in French government bonds is the result of a combination of record-high debt, credit rating downgrades, massive issuance of government bonds, and political anxiety ahead of the presidential election.
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Although the 2027 budget proposal on October 1st contained severe austerity measures, the increase in debt did not stop, and yields briefly exceeded 5%.
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The yield spread with Germany, which uses the same euro, has reached levels not seen since the European debt crisis. This indicates the magnitude of the “credit anxiety” regarding France.
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While a similar dynamic of “fiscal anxiety leading to bond selling” occurred during Japan’s yen depreciation phase, the difference is that in Japan, which holds its own currency, such anxiety tends to manifest as yen depreciation.
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Looking ahead to the 2027 presidential election, the trajectory of politics and fiscal policy will remain a key point of focus.
*This article is based on reports as of October 13, 2026, and does not recommend any specific investments. Please check market data for the latest figures.