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Investors are drawing sharper distinctions between European governments’ bonds as a market selloff pushes France and Italy under renewed scrutiny while German, Dutch and Swiss debt attracts buyers. The shift, reported by Reuters on October 7, reflects rising concern about public finances and political uncertainty, and is changing how investors assess risk across the region.
France, previously a beneficiary of investors seeking relative safety, has been hit by selling. Germany has again emerged as a preferred haven, while Italy and Britain remain exposed to fiscal concerns despite faring differently in the latest moves. Spanish bonds have held up better, supported by economic growth, but investors are watching for signs that French-related concerns could spread.
France’s deficit and election weigh on bonds
France is at the centre of the repricing. Its 10-year government-bond yield rose 70 basis points in September and reached its highest level since 2002, increasing the cost of borrowing as the government faces pressure over its budget deficit ahead of the 2027 presidential election.
The government said in September that the deficit would exceed its 5% target and has announced spending restraint intended to reassure markets. Investors remain doubtful about whether those measures can be implemented. France also plans to issue a record €340 billion ($381 billion) in bonds in 2027 to finance government needs and refinance debt dating from the COVID-19 period.
The premium investors demand to hold French 10-year bonds over German Bunds climbed to nearly 160 basis points last week, its highest level since 2012. It eased earlier this week before widening again on Wednesday, according to the Reuters report. The gap remains well below levels seen during the euro-zone debt crisis, when Italy’s spread topped 500 basis points and Greece’s reached 3,000.
Italy and Britain face different pressures
Italy’s 10-year yield spread over Germany widened to 130 basis points last week, from 80 a month earlier, as investors considered whether concerns about French debt could affect other heavily indebted countries. Italy’s cabinet said its deficit is expected to rise well above the European Union’s 3% ceiling, while public debt is not expected to start falling until 2028.
Italy’s debt-to-GDP ratio stands at 138.6% and is expected to overtake Greece’s this year as the highest in the bloc, Reuters reported. Investors are also monitoring the country’s political outlook ahead of an election next year. The Greek-German yield spread reached a two-year high, while Belgium’s 10-year yield rose 49 basis points in September, a larger increase than most European peers apart from France.
Britain’s bond market has avoided the sharpest pressure, though its 10-year gilt yield rose 36 basis points in September to about 5.43%—around half the increase in France. Investors are looking ahead to the UK’s October budget for evidence of fiscal discipline and plans to support long-term growth. The turmoil surrounding the 2022 “mini-budget” under then-Prime Minister Liz Truss remains a reminder of how quickly concerns over government finances can affect gilts.
Germany and lower-debt markets attract demand
Germany’s status as a European safe haven has strengthened during the latest market moves. Its 10-year Bund yield fell 17 basis points last week even as France’s rose 13, as investors shifted toward perceived safety. Earlier concerns that higher German infrastructure and defence spending might undermine that role have, for now, appeared less influential than demand for a liquid haven.
Japan’s Sumitomo Mitsui DS Asset Management said it had recently sold some French bonds in favour of German and Japanese debt, describing the German purchase as a flight to quality. Yields also fell in other lower-debt markets: by 11 basis points in the Netherlands, 12 in Switzerland and 14 in Sweden last week.
Spain, once among the euro zone’s least-favoured borrowers, has benefited from economic growth in recent years. Its 10-year yield is now 75 basis points below France’s, reversing the relationship seen during the 2012 crisis, when it was 500 basis points higher. Investors are treating Spain as a test of whether French-market concerns remain contained or begin to affect countries with stronger fundamentals.
Contagion remains a question for investors
Market participants have not described a broad regional crisis: the spreads remain far below their euro-zone crisis extremes. But the divergent moves show that investors are paying closer attention to fiscal credibility and country-specific risks rather than treating European government bonds as a single market.
Jeff Mueller, co-head of fixed income at Morgan Stanley Investment Management, told Reuters that a more pronounced widening in sovereign spreads—including those of Spain and Portugal—would signal more extensive contagion. Whether that occurs, and how governments respond to budget pressures, remain key questions for bond investors.
