Key facts
- French borrowing costs depend on presidential candidates raising the retirement age, says RBC BlueBay strategist Mike Bell.
- Pensions are France's largest public expense, costing €436 billion next year.
- Marine Le Pen has previously backed lowering the retirement age to 60.
- The yield premium on French 10-year bonds over German ones could widen to 200 basis points if the retirement age is not raised.
- France has one of the lowest retirement ages in advanced economies at 62.9.
- A Le Pen victory could lead to conflict with the European Central Bank over fiscal discipline.
French borrowing costs are under pressure due to the country's public finances and political uncertainty surrounding the 2027 presidential election, according to Mike Bell, head of market strategy at RBC BlueBay Asset Management. Bell told Reuters that the extent to which French yields rise will depend on whether candidates, particularly frontrunner Marine Le Pen, commit to increasing the retirement age.
Pensions represent France's largest public expense, projected to reach €436 billion next year, or 14% of economic output. Politicians have historically been hesitant to implement reforms that could negatively impact pensioners' purchasing power, a demographic that forms a key voting bloc for Le Pen's National Rally party.
Bell stated that the market desires assurance that the likely winner will implement policies to raise the retirement age, otherwise pressure on yields will persist. He warned that if a candidate likely to maintain the current retirement age wins, the yield premium on French 10-year bonds over German ones could widen to as much as 200 basis points. This spread exceeded 150 basis points last Friday, the highest level seen since late 2011.
RBC BlueBay, managing $598 billion in assets, holds some French bonds but is not overweight, with Bell advising caution given the months remaining until the April 18-May 2 election. He also noted the risks associated with shorting French bonds, as much of the negative sentiment may already be priced in.
France currently has one of the lowest retirement ages among advanced economies, around 62.9 years, depending on birth year, coupled with long life expectancies. A previous government reform in 2023 to gradually raise the retirement age from 62 to 64 was suspended as a concession to secure passage of the 2026 budget.
Bell also suggested that a victory for Le Pen could lead to a confrontation with the European Central Bank, as a nationalist leader might resist external pressure on fiscal discipline. He indicated that some within the ECB and Brussels might view high French yields as a means to encourage fiscal prudence from the next president. The ECB's Transmission Protection Instrument, a bond-buying backstop, is contingent on adherence to EU fiscal rules, which France currently does not meet.