The Le Pen Premium—Our Outlook for French Bonds

French government bond spreads have widened excessively relative to Germany, creating long-term value despite political and fiscal risks.

• Ahead of the spring 2027 presidential election, France’s Parliament still has to vote on the 2027 budget, while the France-Germany bond spread has reached levels not seen since the eurozone debt crisis.
• The government’s proposed budget targets a deficit of 5% of GDP in 2027 through pension indexation below prior practices, civil-service wage cuts, healthcare reductions, welfare freezes and higher taxes on companies, high incomes and payrolls.
• Western Asset expects the government to pass the budget with limited opposition because the parties face the April election and would risk reputational damage by forcing a more aggressive confrontation.
• The recent spread widening is attributed mainly to political concerns and a technical shift away from short-maturity French bonds after a hawkish change in ECB rhetoric and subsequent rate hikes, rather than to a material deterioration in economic fundamentals.
• Foreign investors have reduced their French government bond holdings over recent years but remain the dominant sponsors, while French domestic banks have increased purchases of longer-maturity bonds during the weakness.

Takeaway: Investors should oppose the recent spread widening because current valuations offer long-term value, while recognizing that the ultimate risk depends on the next administration’s fiscal plans, economic growth and France’s long-term funding costs.