Rates Spark: France still singled out
Lead — The desk observes that despite a temporary lift in market sentiment due to revitalized diplomatic efforts in the Middle East, France's fiscal challenges are pulling its bond spreads wider, which is exacerbated by public unrest under President Macron. Per the full note from ing-think, French spreads have surpassed 150bps against German Bunds, signaling substantial market concern. This backdrop raises questions about the future trajectory of the euro, particularly against the USD where our internal consensus anticipates some strengthening ahead, with the median projection set at 1.1700 for March 2026.
What the desk is arguing
The worsening French bond spreads, now exceeding 150bps, reflect ongoing fiscal challenges that significantly undermine market confidence in France's government bonds (OATs). Per the full note from ing-think, these developments were fueled by persistent public unrest which is contributing to GDP losses, creating a dual challenge for Macron's administration: fiscal reforms and maintaining social stability.
Despite improved market sentiment triggered by geopolitical news, investors remain cautious. The comparison to previous sovereign debt crisis levels paints a stark picture; while the spread was just below 200bps during the 2011 peak, the fundamentals then were starkly different, as Italian spreads exceeded 500bps.
This tension creates a plausible scenario where spreads could widen further if not addressed, particularly if unrest escalates or fiscal concerns heighten, thus becoming a pivotal factor for the euro's movement against the dollar.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700, with a range of 1.1200 to 1.2000. Notable projections include: - rabobank: Mar26 1.1759, Dec26 1.1800 - nomura: Mar26 1.1700, Dec26 1.1800, Dec26 1.2000 - ubs: Mar26 1.2000, Dec26 1.2000, Dec26 1.1600
The desk's outlook aligns closely with ing's target of 1.1700 for March 2026, positioning at the higher end of the consensus spread while other firms like tmgm appear more cautious, predicting only marginal gains.
How other firms see it
Several firms, including ubs and nomura, share a bullish view on the EUR/USD trajectory, tentatively supporting a stronger euro toward the end of the forecast period. In contrast, firms like tmgm and mizuho project more conservative targets, suggesting that market sentiment may not fully embrace the optimistic outlook.
Given the focus on fiscal stability in France, watch for any spillover effects on related pairs such as GBP/USD and EUR/GBP. These could reflect broader sentiment around Eurozone stability influenced by France's fiscal dynamics.
What the calendar says
With no upcoming high-impact events on the calendar, the focus remains solely on the evolution of fiscal policies in France and their impact on the bond market. Market participants should closely monitor any unexpected political developments that could affect sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01French bond spreads have widened over 150bps due to fiscal concerns and public unrest.
- 02Revived sentiment from Middle East diplomatic efforts is overshadowed by French economic instability.
- 03The desk aligns its EUR/USD forecast at 1.1700, near the top of the consensus range.
Market implications
Traders should closely monitor the 150bps spread as a critical level for French bonds, signaling stress that could impact the euro's performance. Any significant deviation in French fiscal policy or political developments may act as catalysts for movement in EUR/USD.
Risks to this view
Should public unrest worsen or economic indicators point to stronger-than-expected fiscal challenges, it would likely drive French spreads wider, pressuring the euro negatively. Furthermore, any abrupt shifts in market perception due to geopolitical tensions could also force a reevaluation of current EUR/USD predictions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
ING | Bullish | 1.1300 |
UBS | Bullish | 1.1600 |
Société Générale | Bearish | 1.1000 |
Articles Rates Spark: France still singled out Published 17:24 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Revived diplomatic efforts around the Middle East lift market sentiment, but French spreads still widened beyond 150bp. Fiscal concerns and public unrest clearly weigh on French government bonds (OATs), but more is at play Benjamin Schroeder Recent unrest is adding to concerns around President Macron and France's ability to consolidate its finances France remains singled out, but it's not pure credit concerns Risk sentiment was more upbeat after headlines suggesting a revival of diplomatic efforts to end the Middle East conflict. Energy prices retreated from their recent highs, stocks advanced, and yields edged lower.
Still, markets have learnt to treat such headlines with a healthy dose of scepticism. Within the European government bond space, a tentative stabilisation of spreads over Bunds mirrored the improved sentiment. However, France continues to be singled out, with the 10y spread pushing past 150bp.
We had cautioned that the public unrest was adding to concerns around France's ability to consolidate its finances. The unrest also adds very direct costs in terms of lost GDP , as our economist warns. Back during the days of the sovereign debt crisis, the French spread versus Germany peaked at just below 200bp.
But bear in mind, this was when Italian spreads pushed past 500bp and markets were contemplating the tail risk of a collapsing monetary union, i.e., redenomination risk. To add some perspective, a 10y spread of close to 200bp in late 2011 meant that French bonds yielded more than twice as much as German Bunds. The 10y Bund yield stood at around 1.9%.
Nowadays, French 10y bonds, at just below 5%, yield less than 1.5 times as much as their German counterpart. And that 5% mark in outright yields appears to remain a hurdle for OATs for now. This is not to say that spreads cannot push further, especially in the absence of any good news and with a long way to go until the presidential elections.
But it is important to highlight that there are other factors pushing spreads wider that do not directly reflect pure credit concerns. Overall, rates volatility has increased and weighs on spreads more generally. Especially when market liquidity is subdued, this can exacerbate widening pressures across EGBs.
The French CDS spread, for that matter, while wider, is still 160bp away from its 2011 peaks rather than a bit over 40bp when looking at the bond spread. Wednesday’s events and market view Following the UK CPI release in the morning, it will be a quiet day in terms of data. The main focus will be the public appearances of BoE Governor Bailey and ECB President Lagarde.
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