October 2025
Fixed Income Monthly Report
Chris Edmonds
President, Fixed Income & Data Services, ICE
France: political deadlock and the spillover into bond markets
With much handwringing in the U.S. over the potential fiscal fallout from the government shutdown, a glance across the Atlantic to France provides a reminder of what a self-inflicted political crisis can do to the fiscal health of even the most advanced economies.
France is now well into the second year of a long-running political crisis that has brought down three prime ministers (the most recent of which resigned on October 6 after just 26 days in office), seen the nation’s credit rating downgraded, and driven the republic’s borrowing costs above some investment grade (IG) French corporates.
So what does our data show, in terms of the relative credit impact for the world’s seventh largest economy? And where do U.S. credit spreads stand by comparison?
At a headline level, the toll this political upheaval has taken on France’s bond market since the crisis began in mid-2024 is plain to see in the chart below.
Figure 1. Effective yields on EU-bonds, French, German, Italian and Spanish government bonds, January 2024 - October 2025
Source: ICE Data Indices
At the start of 2024, French borrowing costs were appreciably below those of Italy and Spain, and lower than those of EU-bonds issued by the European Central Bank (ECB). By early October 2025, however, 17 months of political turmoil have seen yields on French bonds (known as OATs) climb higher than those of Spain and equal those of Italy.
This is not solely due to legislative dysfunction in Paris: credit must be given to the monetary authorities in both Rome and Madrid who have worked hard to improve the fiscal footing of their nations, and been rewarded with credit rating upgrades.
It’s also worth noting the convergence of French, Italian and Spanish bond yields with those of EU-bonds. While there was clear daylight between all four cohorts at the beginning of last year, today all are trading in the vicinity of a 3% yield. This convergence reflects not only the improving creditworthiness of Spain and Italy, but a corresponding deterioration in French credit during this period, as the nation’s cost to borrow climbed 50bps amid a backdrop of the ECB cutting rates by 200bps.
The problems besieging the French Treasury took a fresh twist in mid-summer as several French IG corporate bonds began to trade at a negative spread to OATs, confirming that bond investors now perceive these companies to pose less of a credit risk than the French government itself.
Figure 2 demonstrates the pattern using corporate bond yields for four French IG issuers, showing French government borrowing costs flipping from being the cheapest in the sample in January 2024 to the most expensive today. It is worth reiterating the falling ECB rate environment over this period, but it is still extraordinary to see one of the corporate names that was paying a 125bp spread above OATs 21 months ago now able to fund itself more cheaply than the government. As of mid-September, 7% of French IG corporates were funding at a spread negative to OATs, according to a BNP Paribas analysis.
Further trouble may be on the horizon: on September 12 Fitch downgraded France’s credit rating to A+ citing political fragmentation, high and rising debt ratios and an uncertain path forward to achieve fiscal consolidation. Corresponding downgrades by other rating agencies are anticipated.
Yet the data shows this situation is not comparable to the European Sovereign Debt Crisis in October 2011, when the ECB had to take extraordinary action to prop up highly indebted eurozone member states such as Greece, Portugal and Ireland, whose long-term bond yields reached 18%, 12% and 8%, respectively.
Unlike that crisis - which France came out of relatively unscathed - what makes the current situation so remarkable is that it provides fixed income markets with a real-time case study of a prolonged domestic political impasse inflicting meaningful credit deterioration on an advanced nation’s fiscal standing.
Figure 2. French government bond yields compared with yields on four French investment grade corporate bond issuers, January 2024 - October 2025
Source: ICE Data Indices
Figure 3. Credit spread between U.S. investment grade corporate bonds and U.S. Treasuries (top), compared with credit spread between French investment grade corporate bonds and French government bonds (bottom), January 2024 - October 2025
Source: ICE Data Indices
Twice this year, I have written about how U.S. trade policy is impacting fixed income markets, focusing on credit derivatives in April, and then on U.S. Treasuries in July. Both of those pieces shared ICE data revealing that U.S. markets remain resilient in the face of global headwinds, and our third chart confirms that this continues to be the case.
The top two lines of Figure 3 show the spread between U.S. Treasury and U.S. IG corporate bond yields from January 2024 to the present and reveals a stable relationship, with corporate credit trading at a consistent ~100bp spread to Treasuries. This reflects Treasuries’ position as the risk-free rate for U.S. assets, and the additional yield investors demand from corporates to take on their credit risk.
The bottom two lines show the same spread between French government bonds and French IG corporates, starting 2024 with the same ~100bp spread, but steadily narrowing as investors have come to make progressively more skeptical appraisals of French public debt fundamentals. By October 6, 2025, that spread had collapsed to just five basis points.
For American readers observing the situation across the Atlantic within the context of the current U.S. government shutdown, the above charts should serve as a salutary reminder that even seemingly impervious economies can end up paying the price in the bond market for prolonged political brinkmanship in the legislative chamber.
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