French 10-Year Bonds Post Worst Decade Since 1803, Deutsche Bank Says; RBC Strategist Ties Yields to Le Pen's Pension Stance

Since Le Pen's Tuesday announcement of €140 billion in net savings by 2032, the question in French debt markets has narrowed. The number is out. What investors want now is the detail, especially on pensions.

Deutsche Bank strategists Jim Reid and Henry Allen supplied the historical frame. French 10-year government bonds have just had their worst rolling decade of nominal returns since 1803, they wrote. That window still included the Reign of Terror.

France's deficit is forecast at 5.4% of GDP this year against the EU's 3% ceiling. The country has not balanced a budget since 1974. Debt stands at about €3.5 trillion, and debt-to-GDP is 119%.

Reid and Allen note that in 2008 France's debt ratio was broadly in line with Germany's and well below Italy's. "But today it's far above Germany's and closing in on Italy's," they wrote.

How wide the gap got

The French-German 10-year spread blew out last week. Reuters reported it rose above 150 basis points on Friday, Oct. 2, the highest since late 2011. CNN and Morningstar both put the move at the widest since 2012. Deutsche Bank's reading of Bloomberg data goes further: the widest differential since German reunification in 1990.

Those are different measures of the same ugly picture.

On Tuesday the 10-year yield fell 14 basis points to 4.72%, on track for its biggest one-day drop since May, as European government bonds rallied broadly. Laura Cooper, head of macro credit at Nuveen, said Le Pen's plan was contributing to some of that relief. She added that markets are still missing the specifics: "how can they implement some of those?"

The pension gap in Le Pen's plan

Pensions are France's largest public expense, projected at €436 billion next year, or 14% of economic output. Mike Bell, head of market strategy at RBC BlueBay Asset Management, told Reuters on Thursday that the market's verdict hinges on them.

"The market wants to see that whoever is most likely to win, and the polls suggest that's Le Pen, is going to put in place a policy that raises the retirement age. Without that, the pressure keeps building," Bell said.

He said the spread over German bonds could widen to as much as 200 basis points if a candidate who would keep the retirement age where it is looks likely to win.

Le Pen has not offered that. She has previously backed lowering the retirement age to 60 for people who started working early, and her party wants to reverse the 2023 pension reform. The government suspended that reform, which would have raised the age from 62 to 64, to win Socialist votes for the 2026 budget. Le Pen said she will present pension plans in the coming weeks.

Her plan does put numbers on the page. It cuts the deficit to 3% by 2030, caps France's net EU budget contribution at €5 billion, and proposes a referendum on a constitutional "golden rule" requiring at least half a point of deficit reduction a year until debt returns to 60% of GDP. Most of the cuts, she said, would come in the first three years from streamlining how government operates.

Capital Economics chief European economist Andrew Kenningham sees a gap. Her party still backs costly tax cuts, he said, and "investors will also be concerned about greater fiscal populism after the elections." He warned of a "big risk that spreads rise a lot further, either before or after next year's elections."

Where the incumbents stand

Le Pen's rivals are not offering a cleaner story. Le Pen called the budget from Prime Minister Sébastien Lecornu and President Emmanuel Macron "meagre." Kenningham said the government proposed deep spending cuts and tax hikes last week. Bond buyers worry lawmakers will water them down before the election.

The street is pushing the other way. High school students have been protesting since last month over staff shortages, overcrowded classrooms and crumbling buildings. One placard on Oct. 6 read, "Tax the rich, not our future." Defense spending is also set to rise.

UBS strategist Julien Conzano sees the bond market pressure nudging both the Macron government and Le Pen's National Rally toward more discipline, lowering the risk of an expansionary 2027 budget.

A Verian poll for Le Figaro Magazine found 39% of respondents think Le Pen has a clear vision to contain the crisis, against 27% for center-right rival Edouard Philippe.

The ECB problem

Bell also flagged a possible clash with the European Central Bank. "I struggle to see a world in which a pretty fervent French nationalist takes kindly to being told by the ECB what they need to do in order to contain borrowing costs," he said.

He said some at the ECB and in Brussels probably see high French yields as leverage to push the next president toward discipline. The ECB's Transmission Protection Instrument, its bond-buying backstop, is available only to countries that comply with EU fiscal rules. France does not, Bell said.

Le Pen has said discussions with the ECB would be needed to help ease France's borrowing costs once public finances are under control.

RBC BlueBay manages $598 billion and holds some French bonds but is deliberately not overweight, Bell said. It would take a "brave person" to add exposure with months to go, he said, though shorting carries risks too because much is already priced in.

The next test is Le Pen's pension proposal, due in the coming weeks, with the two-round vote set for April 18 and May 2.