On Monday, French government bonds demonstrated outperformance, following Moody's affirmation of France's credit rating late on Friday, October 23, 2026. This decision alleviated immediate fears of a downgrade that markets had widely anticipated. Meanwhile, US Treasury yields edged higher.

This development matters because a potential downgrade of France's credit rating, a major European economy, could have triggered broader financial instability. Moody's decision provides temporary relief to French finances, but ongoing social unrest and a looming presidential election still pose significant challenges.

What the Records Show

Moody's maintained France's sovereign credit rating at Aa3 with a negative outlook on Friday, October 23, 2026. The ratings agency stated this Aa3 rating assumes that a deficit-reducing budget for 2027 will be adopted, and that financing costs and social tensions will abate in the coming months.

In the bond markets, the selloff in French government bonds paused on Monday, October 26, 2026. The country's 10-year OAT yield declined by 4.5 basis points (bps) to 4.976%. This followed a rise to 5.1415% on Thursday, which had been its highest level since June 2002. The spread between German and French 10-year yields tightened by 5 bps to 161 bps on Monday, after having reached its widest level since 2011 just the prior week.

Concurrently, US Treasury yields experienced a slight increase in European trading on Monday, October 26, 2026. The yield on the US 10-year Treasury note hovered just below 5%. Concerns about French debt had previously led investors to seek the safety of US Treasurys, which had helped keep US yields near recent lows. Earlier in the month, on September 15, 2026, the 10-year Treasury yield had reached 5.04%, marking its highest point since July 2007.

French Unrest Continues

The Moody's decision came amidst ongoing domestic social and political unrest in France. Large-scale protests took place on Saturday, October 24, 2026, following prior significant unrest on October 17. The demonstrations were fueled by grievances over school funding, deteriorating teaching conditions, rising living costs, and declining public services.

On October 24, the Interior Ministry estimated that 410,000 people protested nationwide, including 110,000 in Paris, while unions claimed up to 800,000 participants nationally. Although Saturday's protests were largely peaceful, clashes did erupt in Paris and other cities, involving masked protesters, with police deploying tear gas and water cannons. Interior Minister Laurent Nuñez reported 1,314 arrests nationwide. While some looting and violence occurred, it was on a "far smaller" scale than the previous week. This ongoing unrest poses a significant challenge to President Emmanuel Macron's government in the final months of his presidency, ahead of the presidential election scheduled for April and May 2027.

What Officials Have Said

French Prime Minister Sébastien Lecornu welcomed Moody's decision, stating it "confounds the doom-laden forecasts of many 'experts'" and those who speculate on French debt. The French finance ministry also commented that the unchanged rating reflected the "credibility of the budget the government has put forward in the 2027 finance bill, which is designed to keep our public finances on the path to recovery". Economy Minister Roland Lescure saw the decision as "recognition of the strength of our economy and the credibility of the budget" presented by the government, emphasizing the "non-negotiable" goal of adopting a responsible budget by year-end to bring the deficit down to 5%.

What We Could Not Confirm

We could not confirm specific details of the proposed deficit-reducing budget for 2027 beyond its general aim to reduce the deficit to 5%.