France Left Reeling from Yield Reset

The global reset of interest rates has left France as one of the biggest losers. Long-term yields on government debts have risen significantly across the world, but France's yields are surging even more rapidly than in other countries. According to data from Koyfin, between 2017 and 2024, long-term yields were roughly zero or negative before inflation in Japan and 'core' Europe, around 1% in the U.K., ~1.5% in Czechia, about 2% in Australia, Canada, the U.S., and Korea, and about 3% in Poland. However, as of this writing, yields are now significantly higher, with close to 5% in France and Korea, and a bit over 5% in Australia, the U.S., U.K., Czechia, and Poland.

The only rich countries that have largely missed out on the yield reset are Switzerland, Singapore, Taiwan, and Greece. In general, long-term yields in the rich countries are about 2-3 percentage points higher than they were on average in 2017-2019. However, this has not been uniformly reflected in nominal income growth rates across these countries. A simple average across rich countries shows that the most recent 12-month nominal income growth rates are also 2pp faster than the 2017Q1-2019Q4 annualized average.

But while some countries like the U.S., Canada, Japan, Portugal, and Spain have seen a one-for-one link between the uptick in yields and the change in growth rates, others, such as Taiwan, Korea, and Greece, have seen yields rise much less than one might expect based on how much their economies have accelerated. On the other hand, France stands out for its poor performance. Yields on French government bonds now exceed those of Spain, Italy, Greece, and Portugal.

The resulting 1.3pp shift in the spread between French and Italian yields has occurred almost entirely due to problems within France, particularly over the past few months. For instance, while Belgian and Italian yields have been essentially unchanged over the past year, French bond yields are surging even as its nominal income growth has slowed relative to the 2017-2019 pace.

The spread between French sovereign borrowing costs and French growth rates is now the most unfavorable anywhere in the rich world. In fact, France's cost of borrowing was about 2pp higher than its income growth rate as of 2026Q2, which was even worse than the anemic 3% yearly average nominal growth rate recorded in 2017Q1-2019Q4.