Has the sell-off in France gone too far?

French bond-market stress is approaching an unstable equilibrium, but the sell-off may offer selective value rather than signal the breakup of the eurozone.

• Ten-year French yields moved above 5% and the spread over German bunds exceeded 175 basis points, its widest level since 2011, as riots intensified concerns about France’s deficit and public debt.
• The political outlook is central: fiscal reforms are difficult before next year’s presidential election, while the widening of OAT spreads has closely tracked the implied probability of a Marine Le Pen and National Rally victory.
• RBC BlueBay rejects the view that eurozone stability is at immediate risk and sees value in eurozone sovereign credit, with index-level spreads at their widest for several years; Spain, Portugal and Greece are described as robust growth and improving credit stories.
• The ECB could halt balance-sheet reduction and provide further TLTRO liquidity if bank funding conditions deteriorate, but activation of the TPI for France is considered unlikely without a material fiscal adjustment.
• The firm expects fewer Federal Reserve hikes than markets discount as technology weakness points to slower momentum through 2027, while higher energy prices could cause a prolonged inflation overshoot; it favours long short-dated US rates, inflation-linked swaps and the long end of Japan’s yield curve, supported by a record 5.4-times bid-to-cover ratio at a 20-year JGB auction.

Takeaway: Investors should distinguish France-specific political and fiscal stress from a systemic eurozone crisis, with OAT valuations potentially offering long-term value if reforms or political stabilisation emerge, while energy inflation and further risk-asset weakness argue for caution on duration and credit beta.