Euro area debt bourses face risk drag from Paris debt trajectory

On Tuesday, European government bond yields surged back above multi-week lows as investors reassessed the risks associated with French sovereign debt. The German government's two-year Schatz yield stayed steady around 3.229%, while longer-term German Bund yields climbed to 3.479%, following a slight recovery in risk assets. Yet, the prevailing focus remained on Paris, where French government debt has become increasingly vulnerable to default concerns.

Credit default swap (CDS) spreads soared to their highest level since the pandemic's March 2020 peak, reflecting mounting institutional worry over France's fiscal trajectory and political gridlock.

France's projected national debt is expected to hit a record 119.3% of GDP in 2026, with the debt-to-GDP ratio set to exceed 121.7% in 2027. French 10-year OAT bonds have suffered the steepest decline among major developed economies so far this year, with yields climbing by over 90 basis points year-to-date. Investors now demand higher risk premiums for French duration paper due to fiscal slippage, downgraded credit ratings, and political uncertainty after inconclusive legislative elections.

The French 10-year OAT yield rose to 4.502%, widening spreads against core German benchmarks as duration sellers returned. While France's CAC 40 stayed almost unchanged year-to-date, the STOXX 600 index increased by nearly 7% for the year. Despite easing energy market conditions, European fixed-income investors remain cautious as European Central Bank officials prepare to speak.

The ECB's Christine Lagarde is set to address whether the recent 2.50% rate hike is sufficient to support medium-term inflation expectations, or if France's persistent fiscal deficits could complicate the central bank's tightening agenda heading into 2027.