Bond-market watchdogs have slightly loosened their grip on French debt over the past 72 hours. The 10-year OAT yield fell from 5.15% last Thursday to 4.95% this morning, a significant retreat. However, the spread over German debt remains extremely wide, at around 160 basis points.

Beneath the cobblestones, debt

Two factors have worked in the OAT's favor since the end of last week. First, Moody's left France's sovereign rating unchanged in a closely watched decision issued Friday. Second, the demonstrations held across France on Saturday were not marked by scenes of chaos as severe as those seen the previous week, even though turnout remained strong.

That said, the fiscal backdrop remains under close scrutiny. Investors are awaiting clear signals on the trajectory of France's public finances.

Moody's ultimately maintained France's rating at Aa3, with a negative outlook, following its periodic review. The agency remains more generous than its three competitors, S&P, Fitch and Scope, which rate France "A+" (Moody's Aa3 rating is equivalent to "AA-"). Moody's is not expecting an improvement, however. It forecasts a public deficit of 5.4% of GDP in 2026, followed by 5.2% in 2027, versus the 5% targeted by the government. Debt is expected to exceed 120% of GDP in 2027 and continue rising through the end of the decade.

The main danger comes from the rising cost of financing French debt. The yield on 10-year government bonds has increased by 1.5 percentage points since the start of the year, with more than half of that move explained by a widening spread over Germany. The impact on public finances remains gradual because French debt matures, on average, in 8.5 years. However, Moody's warns that if political gridlock prevents a lasting reduction in deficits, or if structural reforms, particularly pension reform, are reversed, the rating could be downgraded. That is what the negative outlook signals.

Relative relief elsewhere as well

Italy's BTPs have also suffered, with the yield rising 11 basis points to 4.54% and the BTP-Bund spread widening 16 basis points to 117 basis points. Peripheral contagion reflects broader aversion to European sovereign risk, even if the scale of the move remains smaller than that seen in OATs. The British gilt, meanwhile, is holding up better, with the yield at 5.47%, down
5 basis points, as London investors focus on the government's budget, due Wednesday.

The US yield curve flattened, with long-term rates falling sharply. The 10-year Treasury yield dropped 9 basis points to 4.99% and the 30-year yield fell 11 basis points to 5.31%, while the 2-year yield gave up just 3 basis points to 4.69%. The 2s10s curve consequently narrowed by 7 basis points to 30 basis points.

The world's three major central banks will announce their rate decisions this week. The Fed, ECB and BoJ are expected to leave rates unchanged.