Chart of the Week
Recent political developments in France have been reflected in fixed-income markets through the widening spread between French and German bond yields. This trend highlights investors’ demand for higher returns to compensate for holding French debt instead of German debt.
Since the French Prime Minister’s press conference on August 25, the spread on 10-year bonds has widened by roughly 10 bps—a much smaller reaction compared to the summer of 2024. As of September 3, the spread stood around 80 bps, down from a peak of about 90 bps at the end of last year.
Meanwhile, implied volatility in the options market has remained low, around 6%. This indicates that market expectations for significant swings in French bond yields are limited. Typically, higher implied volatility reflects anticipation of greater fluctuations.
OUR ANALYSIS
The combination of a relatively high risk premium and low implied volatility suggests that investors perceive French political risk as a “known unknown”—a factor they acknowledge but don’t expect to trigger major disruptions in the near term. In practice, this perception allows investors to continue holding or trading French debt without the need for costly hedging strategies.
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Written on September 5 2025. Opinions subject to change.
See also: Short-Term Bonds Widen the Gap Against Money Market
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