France’s 10-year yield sees 3.51% spike after Fitch downgrades economy

France’s bond markets jolted Monday morning after Fitch cut the country’s credit rating late Friday, pushing the 10-year yield up 7 basis points to 3.5132% by 7:40 a.m. London time, according to data from CNBC.

That was just the first shoe to drop. The 30-year bond, known locally as OATs, climbed even faster, rising 8 basis points to 4.3351%. The spike was short-lived, as yields eased later in the morning around 9:13 a.m., but by then, the news had already cracked through every trading desk in Europe.

The downgrade wasn’t unexpected. Fitch downgraded France from AA- to A+, keeping a stable outlook, but warning that the country’s rising debt burden and fractured political system are making it harder to get fiscal policy under control.

The statement pointed to a “high and rising debt ratio” and “political fragmentation” as the two main reasons for the cut. The agency also warned there’s no clear plan in place to stabilize the debt in the years ahead.

The rating action landed just as France was already neck-deep in political chaos. Former Prime Minister Francois Bayrou was forced out Monday after losing a confidence vote, and the vacuum he left behind only made investors more nervous.

Bayrou had pushed for €44 billion ($51.5 billion) in spending cuts and tax increases. He couldn’t sell that to parliament or the public. Now it’s someone else’s problem.

Macron installs Lecornu while bond traders brace for more cuts

President Emmanuel Macron responded fast. Just hours after Bayrou’s collapse, he named Sebastien Lecornu, the former defense minister, as the new prime minister. That makes Lecornu the fifth person to hold the job in less than two years. Whether he can hold onto it is already up for debate.

Lecornu got zero breathing room. Protesters swarmed the streets on the same day he took office. More union-led strikes are on the calendar this week, with the biggest disruptions expected Thursday.

The demonstrations target the same economic reforms that helped sink Bayrou’s government. Analysts say Lecornu will face the same parliamentary opposition to the painful budget cuts needed to shrink France’s deficit.

The first thing Lecornu did was pull one of Bayrou’s most unpopular ideas — the plan to eliminate two public holidays. That proposal was supposed to save money but ended up triggering even more backlash.

ING analysts flagged that move in a note Monday, saying Lecornu’s quick U-turn signals how toxic the spending debate has become.

Fitch warns deficit still too high as more reviews loom

Fitch didn’t just downgrade the rating and leave. They projected that France’s budget shortfall will still be 5.5% of GDP in 2025, only a slight drop from 5.8% in 2024.

That number is nearly double the projected eurozone median of 2.7%. The agency also forecast France’s total public debt will rise from 113.2% of GDP in 2024 to 121% by 2027.

The warning that there’s “no clear horizon for debt stabilisation” in the future spooked bond desks. And it wasn’t just about Fitch. There’s more on the way. Moody’s is scheduled to review France’s rating on October 24, and S&P Global Ratings is expected to follow up with its own decision on November 28.

Market watchers say investors were already pricing in more pain. In their note Monday, ING analysts wrote, “French sovereign bonds have been trading at spreads to swap rates consistent with multiple downgrades.”

They also said it wasn’t surprising that Friday night’s downgrade didn’t cause a full selloff, since many had already expected the move.

But ING emphasized what happens next depends on Lecornu’s ability to pull together a plan that the National Assembly can back.

“Locally, the focus is on how quickly, if at all, new French Prime Minister Sébastien Lecornu can focus the minds of a disparate National Assembly on the unpopular but essential path of fiscal consolidation,” the analysts wrote.

Even if things don’t spiral, investors aren’t ignoring the risks. ING told clients to watch the forex markets, adding that players will “keep one eye on French debt,” though their “core view… is that this is not going to broaden into another euro zone crisis.”

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