France and Italy borrowed at almost the same cost for the year to August. On Friday, France's 10-year yield reached a record 30 basis points above Italy's, according to Bloomberg.
France now pays a record premium over Italy to borrow for ten years. Until last year, markets treated Italy as the riskier borrower. The reversal has arrived in the middle of an energy shock and a budget fight, and the October budget votes are the first test of whether it lasts.
Bloomberg reported that the gap between the two countries' benchmark 10 year yields hit a record 30 basis points on Friday. That is the widest since the euro was founded. A basis point is one hundredth of a percentage point. The French bond is called the OAT, the Italian one the BTP, and the German benchmark the Bund.
How the gap changed
Until recently, the two bonds paid almost the same yield. Eurostat's monthly series shows the French yield within 10 basis points of the Italian one in every month from September 2025 to August 2026. Eurostat is the European Union's statistics office.
In August, the last month published, France paid 4.00% and Italy 3.99%. That is a gap of one basis point. The two countries borrowed at almost the same cost for a full year.
Italy had spent a long stretch closing the distance to Germany. Its spread over Bunds, the extra yield it pays over the German bond, fell from 119 basis points to 80 over the 20 months to August. Italy was once seen as the weaker credit.
France's spread stayed between 66 and 84 basis points over the same stretch. Italy's was the wider of the two in most recent months. The chart below plots both lines against Germany.
The chart ends in August because later months are not yet published. At that point, the gap was about 1 basis point. Eurostat's figures are monthly averages, while Bloomberg's record is a reading on one day. So the jump from 1 to 30 basis points overstates the change.
Allianz Research measures the damage since the Hormuz crisis began. Ten year yields have risen 150 basis points in France and 83 in Germany. Italy's yield rose 132. France's rise minus Italy's is 18 points. Most of the move is shared, and only part of it is specifically French.
The 18 point lead is smaller than Bloomberg's 30 point record. Both measures show investors charging France more than Italy, a reversal from most of the past year.
Why France is paying more
France's fiscal and political weakness explains most of why it is hardest hit, the report says. French deficits have stayed above 5% of GDP for four consecutive years. GDP is the size of the economy. Debt passed 119% of GDP in the second quarter. The deficit this year is now expected at 5.4%, against an initial target of 5%.
Part of Italy's rise may be contagion from Paris. The report describes a "short Europe" trade, in which investors bet that euro area bond prices will fall. That trade spreads French stress to other euro area bonds. Even so, the gap still measures how much more investors charge France than a neighbour caught in the same move.
The report calls the speed a positioning shock, meaning many traders had to change large bets at once. It cites speculative shorts, which are bets on falling prices, and hedge fund unwinds, which are funds closing earlier bets. It also cites market depth, the amount that trades without moving prices, more than 50% below normal.
Foreign banks and non bank investors hold 36% of OATs. These holders react quickly to price moves, which exposes France. Long term investors, the report adds, are sitting out ahead of the elections because the budget is uncertain.
A separate market report said French 10 year yields moved as much as 16 basis points lower and 18 higher on successive days this week. French bonds were heading for their first weekly gain in six, and Italian bonds for their first in nine.
The same report said yields were falling across the region and that Brent crude, the global oil benchmark, had dropped toward $100 a barrel. Even as yields fell, the gap reached a record.
A limited backstop
The European Central Bank, the euro area's central bank, is a limited backstop. Allianz says it has not yet intervened and may limit itself to words. It expects the Transmission Protection Instrument, a tool for stressed members, to be activated only in a full political and fiscal crisis.
French and Italian bonds together make up 50% of euro repo collateral, according to Allianz. Repo is a short term loan secured by bonds, and collateral is the asset pledged. Treasurers holding government bonds as collateral now face a measurable cost for choosing the OAT over the BTP.
On a EUR 100 million holding, 30 basis points is EUR 300,000 a year of extra yield. That is an estimate based on Friday's gap. The extra yield earned for holding the bond is called carry, and here it is the payment for French budget risk.
The next tests: budget votes and elections
The Assembly votes on the budget on 20 and 27 October. Allianz expects a budget by year end, passed through ordinances or Article 49.3. Ordinances are government decrees. Article 49.3 lets the government pass a bill without a parliamentary vote.
Allianz puts the 2027 deficit at 5.3% of GDP. A budget would still be likely by year end after a failed vote, but the failure would show how little room the government has.
Allianz's scenario bands are for France's spread over Bunds and do not cover the gap with Italy. The baseline puts that spread at 120 to 150 basis points. The adverse case puts it at 150 to 175 if oil stays high or the government falls.
CTOL expects the gap to still be above 15 basis points after the second budget vote. This is CTOL's own expectation. Allianz gives no forecast for the France-Italy gap. Italy shares the oil shock, so what remains is the price of French politics. The watered down budget Allianz expects by year end would not remove that political risk. The presidential election on 18 April and 2 May 2027 is the next test.