Investors are turning bearish on French government bonds as political factions brace for a contentious battle over the 2027 budget and the presidential election looms on the horizon. Data from bond futures trading reveals that market participants are building fresh short positions in French debt, with open interest in the 10-year French bond futures contract expiring next year surging to its highest level since early June, a period during which this contract has been the most actively traded French bond future.

A team of strategists at Barclays, led by Mark Kitson, notes that bearish wagers against French bonds appear to have been steadily increasing throughout the summer. In a report dated August 12, the strategists wrote that investors are "positioning ahead of upcoming domestic political catalysts," with the most critical being the budget formulation process this autumn and the presidential election in April of next year. Marie-Anne Allier, a fixed income fund manager at Carmignac Gestion, remarked, "We are heading into an election, and there is likely to be a great deal of political instability before 2027. You are in a dynamic environment that is highly unfavorable for France." She is currently shorting medium-term French bonds while going long on German, Italian, and Spanish debt.

As the autumn budget approaches, traders are shorting French bonds. Starting in September, French Prime Minister Sébastien Lecornu will have to navigate a fractured parliament while his government drafts the 2027 budget, aiming to bring the fiscal deficit below 5%. He has cautioned that failure to reach an agreement could delay the passage of the fiscal plan until late next year and might push the deficit to 6.5%. Meanwhile, candidates are gearing up for the upcoming presidential election, scheduled in two rounds on April 18 and May 2, 2027. Polls indicate that far-right populist figure Marine Le Pen is currently leading the race, and her rising support could make it harder for Lecornu's government to push through austerity measures. On the far-left, candidate Jean-Luc Mélenchon has proposed increasing spending and cancelling part of the national debt held by the Bank of France.

France's 30-year bond yield surged 12 basis points on Friday and edged slightly higher again on Monday to 4.86%, marking its highest level since 2008. The yield premium investors demand for holding 10-year French bonds over German Bunds jumped to 84 basis points on Friday, the highest since last October, signaling escalating pressure on French debt. The political risk premium is widening the spread between French and German bonds. Théo Legrand, rates strategist at Natixis, indicates that his index measuring country-specific risk shows about 25 basis points of the widening spread between French and German yields can be attributed to such risks, "the highest level since the budget-related tensions in December 2025."

There are already some clues about what the next budget might contain. In a July interview, Lecornu stated he does not want to raise taxes. At the same time, the damage from forest fires, heatwaves, and drought that swept through France this summer is becoming another strain on public finances. In a letter to farmers over the weekend, Lecornu pledged new measures in 2027 to support those affected. Last month, French Finance Minister Roland Lescure cut the government's 2026 economic growth forecast from 0.9% to 0.7% and noted that the goal of reducing the fiscal deficit from 5.1% in 2025 to 5% now appears "difficult."

Neil Scanlan, portfolio manager at Mediolanum, says he wants to see the spread between 10-year French and German bonds widen further before he starts buying French debt. Scanlan notes, "If the spread approaches the upper bound of 90 basis points, we might start buying French bonds in small amounts, overweighting them relative to German bonds at that level." France's credit rating will also come under renewed scrutiny this autumn, which could heighten bond market volatility. Last autumn, as the minority government struggled to pass the budget, S&P Global Ratings, Morningstar DBRS, and Fitch Ratings all downgraded France's debt rating, while Moody's cut its outlook on France. The French debt management agency expects rating agencies to begin announcing their credit decisions on France from August 28, with other assessments continuing through the end of the year.