For years, France was a popular bet for investors seeking slightly better returns than other economies. Bond yields were higher, and a deep and liquid market made it attractive for hedge funds making debt-fueled trades.

But a mix of bond volatility and French politics blew those trades out of the water this week, putting the country's debt markets at the center of worries about whether higher borrowing costs will light a fire somewhere in the global financial system.

The selling turned wild on Thursday and continued Friday, with short-term French bond yields gyrating as much as 0.40 percentage points at one point over the two days, some of the biggest moves in years.

The action in European bond markets caught some money managers off guard, leading to a self-fueling bout of losses and selling.

"It's been a slow bleed until this week, until the last two days, which suggests people were starting to get tapped on the shoulder by risk managers and told it's time to vacate," said Hank Calenti, fixed-income strategist at Japanese bank SMBC in London.

While broader markets showed signs of stabilizing on Friday, with French stocks and the euro rising, some think the shakeout won't go away easily.

Foreign investors remain big holders of French government debt, which leaves the market more exposed to bad news, said Konstantin Veit, a fund manager at Pimco, the giant investment-management firm. "Hedge funds are unwinding their carry trades, of which France has been part," he said, referring to bets that rely on borrowed money in one market to fund purchases in another.

Also a factor, longer-term investors from Japan and elsewhere have less of a reason to hunt for returns in France now that they can now earn good money at home or in safer markets such as Germany. France's 3.5 trillion-euro government bond market is the largest in Europe thanks to years of high deficit spending. More than half of that money, worth $3.9 trillion, is owned by foreigners, according to MUFG.

Some investors said the selloff will eventually create opportunities to buy French debt, especially because the European Central Bank ultimately backstops eurozone government bond markets. But they say yields could still rise to significantly higher levels.

"It looks like it's got the potential for a French government bond crisis in the making," said Mike Bell, head of market strategy at RBC BlueBay Asset Management.

Credit-ratings firms could downgrade France, he said, and the 10-year yield difference compared with German bunds could exceed levels of the eurozone crisis if right-wing presidential candidate Marine Le Pen becomes the runaway favorite to win the presidential election next year. Analysts say she could worsen France's public finances with promises including a big reduction in the pension age.

At its widest, French 10-year debt paid a yield 1.81 percentage points over equivalent bunds in November 2011, according to FactSet. On Friday, the gap wasn't far off that, at 1.55 points.

Despite profligate spending and the prospect of far-right or far-left parties taking power in next year's election, hedge funds and other investors piled into bets over the summer, according to traders and bond analysts. They figured French politics wouldn't get much rockier in the near term.

But they did get rockier, thanks to a widening poll lead for Le Pen and a poorly received budget plan from Emmanuel Macron's government. Adding to the mix: a broad selloff in government debt globally, fueled by faster U.S. growth, inflation and rising energy prices.

Popular trades gone wrong include buying French and Italian government bonds while selling German bunds. The thinking went that yields in France were already historically high compared with those in the safer German market, and bound to revert toward more normal levels despite budget travails in Paris.

Instead, "le spread," traders' shorthand for the difference in borrowing costs between France and Germany, widened dramatically, as did "lo spread," or the extra yield on Italian government bonds over bunds. In a sign that the unwinding bond trades were causing pain elsewhere in European markets, the euro slid Thursday, as did stocks.

"Going long France and short Germany, that intra-Europe carry trade has gotten crushed," said Calenti.

Robert Tipp, chief investment strategist at asset manager PGIM, said the extent of the selloff was driven by forced selling, rather than a fundamental change in France's creditworthiness. A sign of that, he said, is that the spread between five-year bonds widened more than 10-year spreads. Usually, the opposite should happen.

"The shorter-term bonds are less risky-there's less time for bad things to happen," he said.

Another trade that went up in smoke, money managers say, was buying French and Italian bonds and selling interest-rate swaps. This strips sensitivity to interest-rate expectations out of the bonds, leaving a bet on the underlying riskiness of the country.

Bonds that mature in between two and five years were a particular target for this trade, one investor said. The bet was that despite France's precarious fiscal position, a country of its size was unlikely to default, especially in such a short period. The investors would profit if bonds outperformed relative to swaps, which acted as the hedge.

On Thursday, prices on the two-legged trade went the other way, putting anyone who had bought in recent weeks underwater. German bonds, on the other hand, outperformed swaps, suggesting investors were flocking to the safety of Europe's biggest economy, said Luca Salford, a strategist at Morgan Stanley.

In past selloffs, foreign investors have generally been eager to step in and buy French bonds at higher, more attractive yields. But that dynamic changed this week.

At L&G Asset Management in London, fund managers at first saw what they thought was a great opportunity to buy French government bonds and sell bunds in recent days. It wasn't just that "le spread" was historically wide. The fund managers also thought bond math would play in their favor. As time passes, a five-year bond becomes a four-year bond, which typically has a narrower spread over safe assets, giving a source of extra return.

Their colleagues on the rates-strategy team said no-too many investors were still long France, and could create a self-fueling selling cycle if they ran to the exit at once.

They were vindicated in Thursday's disorderly selloff, said John Roe, head of multiasset allocation. "It's very tempting when you see numbers you've not seen for a long time to dive in," he said.