Moody's reviews France's debt as bond yields hit 5%, highest since 2002

France's 10-year government bond yield hit 5% on Thursday, a level last seen in 2002, as Moody's prepares a credit rating decision that analysts expect to deliver a downgrade after U.S. markets close on Friday.

The New York-based rating agency has held France at Aa3 since December 2024. In October it shifted the outlook from "stable" to "negative," citing "the increased risk that the fragmentation of the country's political landscape will continue to impair the functioning of France's legislative institutions." Moody's is not obliged to change anything if it judges the current rating still valid.

The review lands amid violent unrest. Protests that began with high-school students demanding better conditions at schools have spiraled into nationwide riots over living costs and political dissent. Paris has extended a curfew. Lyon and Marseille have banned all protests outright.

What is happening to French borrowing costs?

The selling has pushed French debt to historic milestones. Jim Reid and Henry Allen of Deutsche Bank calculated that the French 10-year bond has delivered its worst year for returns in 223 years — a stretch that includes the Reign of Terror, the violent phase of the French Revolution that began in the 1770s, in earlier 10-year rolling calculations.

The spread between the French 10-year yield and its German equivalent has widened to its highest in nearly 15 years. France's 10-year yield has also climbed above the 10-year U.S. Treasury yield for the first time since 2013.

What does the downgrade call look like?

Andrzej Szczepaniak, senior European economist at Nomura, told clients he expects Moody's to cut France to A1 with a stable outlook. That would align Moody's rating with those of S&P and Fitch.

"France's meaningful primary deficit raises stark debt sustainability concerns for investors," Szczepaniak wrote. "France appears to lack the political ability or will to make meaningful changes to reduce the deficit or introduce structural reforms that lift growth over the medium term."

Brent Donnelly, president of Spectra Markets, shares that call. He framed the range of outcomes for clients:

• An affirmation of Aa3 with a negative outlook — bullish
• A one-notch cut to A1 — the base case
• A two-notch cut — bearish

"A surprise would either be 1) an affirmation of Aa3 with a negative outlook (bullish), or 2) a two-notch cut (bearish)," Donnelly said. "Two notches would be a barnburner."

Why is the budget stuck?

The French government has not passed its 2027 budget. The deficit is running near 5.4% of gross domestic product — the highest in the eurozone and well above the EU's 3% ceiling. The record is worse than it looks: France has not run a balanced budget since 1974, half a century of continuous shortfalls that bond investors now price with multi-decade-high yields.

Is the turmoil spreading beyond France?

Robin Brooks, a senior fellow at the Brookings Institution and former Goldman Sachs strategist, said the French blow-up is already transmitting across markets. Contagion has hit high-debt eurozone members such as Italy and Spain. Money has flowed into safe assets: U.S. Treasurys and low-debt European states including Germany, Sweden and Switzerland.

Brooks described the situation as a "global game of whack-a-mole" in which the only certainty is that high-debt countries will keep maneuvering to cap their yields. He also flagged a possible exit: a sell-off in oil prices could defuse the French debt crisis by easing inflation pressure.

Friday's decision will show whether Moody's formalizes what bond markets have already concluded — that France pays a political risk premium its EU peers no longer carry.