France’s central government budget balance widened to €-93.3bn in May, down from €-69.6bn previously, extending the deficit over the period. The deterioration indicates a larger shortfall between state receipts and expenditure as the year progressed into late spring.
The latest figure compares with the earlier €-69.6bn reading and points to a deeper cumulative gap at this point in the calendar. The data provide a snapshot of the government’s fiscal position in May, with the balance remaining in negative territory.
Fiscal Deterioration and Bond Market Implications
The latest May budget figures, showing a deficit widening to €93.3 billion, reinforce our view on France’s deteriorating fiscal position. This trend suggests increased government borrowing is unavoidable in the near term. Consequently, we anticipate upward pressure on French government bond yields.
Given this outlook, we are looking at short positions on French OAT futures, betting that their prices will fall as yields rise. The widening spread between French and German 10-year bonds, which we saw spike during the political turmoil back in mid-2024, is a pattern we expect to see again. This spread currently sits around 75 basis points, but we see it testing higher levels.
Broader Market Risks and Hedging Strategies
The pressure on public finances is likely to spill over into the equity market, creating headwinds for the CAC 40 index. We are therefore considering buying put options on the CAC 40 as a direct way to position for a potential downturn. This strategy provides a hedge against fiscal consolidation measures that could dampen economic growth and corporate earnings.
This country-specific weakness within the Eurozone could also weigh on the euro, particularly against the US dollar. The EUR/USD exchange rate, currently hovering around 1.0850, might face downward pressure as investors differentiate between economies. We will be watching for opportunities to enter short positions in EUR/USD futures.
We must also consider the risk of another credit rating downgrade, remembering that S&P already lowered its rating to ‘AA-‘ back in 2024 due to similar fiscal concerns. An increase in France’s 5-year credit default swap (CDS) price, now at about 40 basis points, would signal growing market anxiety. We see value in purchasing CDS contracts as a hedge against this escalating credit risk.
