French government bonds have overtaken German bunds as the most borrowed European sovereign securities. Balances reaching €417 billion in European government bond borrowing are now at their highest since the global financial crisis, as investors implement directional short positions and spread trades to capitalize on the rising yields driven by political instability and fiscal concerns, writes S&P Global Market Intelligence in a recent article.
Government bond markets have experienced significant volatility in recent months, with long-dated yields reaching multi-year highs across several major economies. The global bond sell-off has been particularly pronounced in the UK, France, and Japan, reflecting growing investor concerns about inflation persistence, fiscal discipline, and political stability.
Despite the broader global trend of rising yields, US Treasuries have demonstrated relative resilience. The 10-year Treasury yield has fallen by more than a third of a percentage point this year, making it the only major bond market where rates declined at that maturity.
France’s bond market has emerged as a focal point of concern following the collapse of Prime Minister François Bayrou’s government in a no-confidence vote. This political upheaval has derailed planned €44 billion deficit reduction measures, leaving fiscal policy adrift at a critical juncture with the country currently facing the eurozone’s largest budget deficit at 5.8% of GDP.
The market response has been swift and firm. France’s yield premium over Germany, a key gauge of risk, has climbed to levels last seen in January 2025. The 10-year French bond yield has surpassed those of Spain, Greece, and Portugal, countries once at the center of the euro zone debt crisis.
Most strikingly, the spread between French and Italian bonds has narrowed dramatically, with the gap between their 10-year yields shrinking to just 0.14 percentage points, reflecting a fundamental reassessment of France’s credit quality.
Securities lending activity surges
Investors are increasingly implementing directional short positions on French debt, anticipating further political instability and fiscal deterioration. The widening spreads between French bonds and their German counterparts present attractive relative value opportunities, with hedge funds and proprietary trading desks establishing spread trades that capitalize on diverging yield trajectories.
Additionally, primary dealers and market makers are borrowing more bonds to facilitate liquidity provision in increasingly volatile markets. With record bond issuance activity, European sovereign, high-yield, and investment-grade debt sales reached an unprecedented €49.6 billion in a single day, market participants require greater inventory to meet client demand and manage risk positions.
Outlook and implications
The combination of rising yields, political uncertainty, and increased securities lending activity suggests continued volatility in European government bond markets. France’s fiscal challenges appear particularly intractable given the political deadlock, with investors demanding higher risk premiums that may persist beyond any near-term resolution of the governmental crisis.
For global investors, these developments underscore the importance of differentiation within sovereign debt markets. While US Treasuries benefit from expectations of monetary easing, European bonds face headwinds from political instability, fiscal concerns, and structural market changes. The divergence between core and peripheral European yields has reversed historical patterns, with traditional “safe havens” like France now trading at risk premiums approaching those of formerly distressed sovereigns.
As central banks navigate these complex market dynamics, their policy decisions will be crucial in determining whether the current bond market tensions represent a temporary disruption or a more fundamental repricing of sovereign debt.