France Plans Record €340 Billion Bond Sale as Deficit Widens and Yields Hit Crisis Highs

France is about to ask bond investors for more money than it ever has, at a moment when they are charging it the most in nearly two decades. The country's debt agency, Agence France Trésor, said it plans to borrow a record 340 billion euros in 2027, about $385 billion.

That is some 28 billion euros more than this year. The money will fund government spending and refinance debt taken on during the Covid pandemic that is now coming due. The agency will raise it through a mix of medium- and long-term bonds.

The rate assumption is already behind the market

The government's budget math rests on a 4.3% interest rate for its 10-year bonds in 2027. When the borrowing plan was announced, French 10-year paper was trading around 4.8% on the secondary market.

Half a percentage point matters on 340 billion euros of issuance. For the forecast to hold, yields need to fall meaningfully from here. Otherwise France will pay more than it has budgeted from the first auction of the year.

The market has not been moving in that direction. Yields on French government debt recently reached levels last seen during the global financial crisis, as investors worry about the size of the debt stock and the repeated failure to shrink the deficit.

A deficit going the wrong way

The public deficit came in at 5.1% of GDP last year. It is now forecast at 5.4% this year, moving further from the European Union's 3% limit instead of closer to it.

Refinancing pandemic-era debt at more than 4% raises the interest bill on the same stock of obligations, and every euro spent on interest is a euro unavailable for current spending. A wider deficit then requires more borrowing, which is how a record one year becomes a bigger record the next.

France is not alone in paying more. Long-dated government debt has sold off across major economies, with the US 30-year Treasury yield reaching a 19-year high and the 10-year Treasury touching 5%. What sets France apart is that it faces those global rates with a deficit that is still growing and little political room to change course.

Promises and a calendar

Prime Minister Sébastien Lecornu has vowed to cut the deficit next year, and to do it without austerity. How those two commitments fit together has not been spelled out.

The calendar is working against him. Presidential elections are only months away, a period when governments rarely volunteer spending cuts or tax increases, and when investors have to price in the possibility that the next administration will have different fiscal plans altogether.

So the 2027 program will be sold into a market with plenty of open questions. Investors will be buying record volumes of French debt without knowing who will run the country for most of the bonds' life, or whether the deficit path they are being shown will survive the campaign.

Demand for French bonds has not failed, and the agency has long experience placing large volumes. The issue is price. Each auction that clears above 4.3% widens the gap between the budget France has written and the one it will actually have to fund.