How far French borrowing costs rise will depend on whether presidential candidates, above all far-right frontrunner Marine Le Pen, commit to raising the retirement age, RBC BlueBay Asset Management's head of market strategy told Reuters in an interview.
France's borrowing costs have surged in a global bond market selloff as investors single out the country over its fragile public finances and political uncertainty due to the presidential election in the first half of 2027.
Pensions are by far France's single biggest public expense, reaching €436 billion next year, or 14% of economic output, and politicians have long been reluctant to pass any measures that would hurt pensioners' purchasing power. Older voters are also a key bloc of Le Pen's National Rally party.
"The market wants to see that whoever is most likely to win, and the polls suggest that's Le Pen, is going to put in place a policy that raises the retirement age. Without that, the pressure keeps building," Mike Bell told Reuters.
Le Pen has previously backed cutting the retirement age to 60 for people who started their careers early. She fleshed out much of her budget plans on Tuesday, but left out details of pension reforms, saying she would outline them in the coming weeks.
Bell said the yield premium investors demand to hold French 10-year bonds over German ones could widen to as much as 200 basis points if a candidate who would keep the retirement age where it is looks likely to win. The spread rose above 150 basis points last Friday, its highest since late 2011.
RBC BlueBay, which has $598 billion of assets under management, holds some French bonds but is intentionally not overweight, Bell said, adding that it would take a "brave person" to increase exposure with months still to go before the April 18-May 2 election.
He also cautioned that shorting - positioning for further falls in French bonds - carries risks, since a lot of risk is already priced in.
TENSION WITH ECB
France has one of the lowest retirement ages among advanced economies - 62.9 subject to when a person was born - and longest life spans.
The government suspended a 2023 reform to raise it gradually from 62 to 64 in a concession to Socialist lawmakers needed to pass the 2026 budget last year.
A Le Pen victory in the presidential election could also set up a clash with the European Central Bank, Bell said.
"I struggle to see a world in which a pretty fervent French nationalist takes kindly to being told by the ECB what they need to do in order to contain borrowing costs," he said.
He said some at the ECB and in Brussels probably see high French yields as a way to push the next president toward fiscal discipline.
The ECB's bond-buying backstop, the Transmission Protection Instrument, is only available to countries that comply with EU fiscal rules, and France does not, he said.
Reporting by Leigh Thomas and Gabriel Stargardter; Editing by Toby Chopra
