Economist Cedric Gemel of Gavekal Research says that as next year's presidential election approaches, under an extreme scenario, the spread between French 10-year government bonds and German 10-year government bonds could widen to 150 to 300 basis points.

In recent months, energy shocks have pushed up rate hike expectations, and combined with growing market concerns over France's political and fiscal outlook, the France-Germany bond spread has widened significantly.

Gemel outlined three possible paths for how this spread could evolve going forward.

Given that France's fiscal situation is unlikely to improve substantially, the possibility of a significant narrowing of the spread is relatively low.

If there are "clear signs that the French government intends to reject the political and fiscal constraints attached to eurozone rescue packages, rendering the eurozone backstop mechanism ineffective in limiting the spread," then a "European debt crisis-style sharp spread surge" could unfold.

Under that scenario, referencing Italy's precedent in 2018, the French bond spread could widen to a range of 150 to 300 basis points.

However, the most likely scenario is that investors will continually test "the trigger threshold of the eurozone financial backstop mechanism, as well as the political conditions required to activate it," with the spread undergoing gradual repricing as a result.

On Thursday, the France-Germany bond spread widened by 5 basis points to 132 basis points.

Gemel added that current yield levels indicate the market expects a significant downgrade of France's sovereign credit rating, from AA- to BBB-.