European bond markets shift focus as French fiscal risk rises

European bond markets are seeing a shift in investor perception regarding sovereign risk. According to the Financial Times, France has emerged as a primary concern for bond investors, with French 10-year yields recently exceeding those of Italian BTPs. This trend suggests markets are pricing in higher risk for Paris due to political instability and significant budget deficits, which the European Commission estimates could reach 5.1% of GDP in 2026 and 5.7% in 2027.

While Italy maintains a much higher debt-to-GDP ratio—projected at 139.2% for 2027 compared to France's 120%—Rome has shown improved fiscal management. Italy's deficit is expected to fall to 2.9% of GDP by 2026, supported by a primary surplus.

In response to broader geopolitical instability and rising global public debt, central banks are taking defensive measures. The Dutch Central Bank (DNB) moved 27 tonnes of gold from New York and Ottawa to Zeist, subsequently transferring it to the Bank of England to ensure easier liquidity during crises. Simultaneously, the European Commission has launched the ‘Savings and Investment Union’ to encourage European investors to keep capital within the continent rather than shifting it to the United States.