Since the Iran war began, European bond spreads—a measure of risk perception among investors—have been rising. Spreads of 10-Year French Government Bonds have widened by 81 basis points (bps) to 137 bps as of 5 October relative to benchmark 10-Year German Bunds, reaching levels not seen since the Eurozone debt crisis of 2011–2012 (Exhibit 1).
EXHIBIT 1
Rising European Bond Spreads Mirror Rising Uncertainty
Select European Bond Spreads Over Benchmark 10-Year German Bunds
Source: Bloomberg
As of 5 October 2026
To understand why this is so concerning, consider the historical context. After the inception of the euro in 1999, European government bond spreads converged as investors assumed that a shared European Central Bank would sharply reduce the risk of currency devaluation and debt defaults across member countries. These illusions were shattered from 2010 to 2012, when Greece’s debt crisis triggered fears of a sovereign default and raised questions as to whether other countries like Portugal, Ireland, Italy, and Spain might follow suit. Yield spreads over comparable German bonds rocketed.
Spreads have generally re-converged since that crisis1—which is why recent widening in France, Italy, and Spain is raising concerns about an underlying change in sentiment.
France is leading the way—in the wrong direction—with spreads increasing to 137 bps against a backdrop of rising debt and political uncertainty. France's net debt-to-GDP ratio hit 117.6% as of Q1 2026, according to Eurostat—an increase of four percentage points from the Q1 2025 level. Meanwhile, the country has had four prime ministers in the last five years, in large part due to its inability to agree on fiscal packages that would reduce the fiscal deficit sufficiently. Currently, the French government is struggling to reach a deficit target of 5% of GDP against a backdrop of 3% nominal growth, which suggests the country’s debt-to-GDP ratio—already well above 100%—appears destined to rise even higher. Adding to the pressure, France has committed to increasing its defense spending from 2.2% of GDP in 2025 to 5% alongside its non-US NATO allies, which suggests that meeting future fiscal targets will be even more challenging in the absence of major structural reforms.
Italy, which has seen spreads reach the highest level in 16 months at 113 bps, has taken a more fiscally responsible path in recent years while also enjoying a relatively stable domestic political backdrop. But its primary challenge is its debt-to-GDP ratio: At 138.9% as of Q1 2026—1.6 percentage points higher compared to Q1 2025—it is one of the most indebted governments in the developed world.
Spain, with spreads at 63 bps, is the best placed of the three countries given its Eurozone-leading GDP growth rate propelled largely by high immigration levels. Spain’s nominal annual GDP growth averaged 8% for the last five years with real GDP growth of 3.8%, and its growth was so strong that its debt-to-GDP ratio fell 13 percentage points to 101.6% in the five years through Q1 2026. However, this week brought signs of political instability as Prime Minister Pedro Sanchez’s government called snap elections for 29 November (versus the prior deadline of summer of 2027), potentially leading to a less positive fiscal outlook depending on the composition of the resulting government coalition.
Germany is a different story. While no sovereign is “risk free” in my opinion, Germany is one of the lowest-risk major sovereign debt issuers globally and hence is the benchmark against which other European governments are compared. It faces its own domestic political risks—but with a debt-to-GDP ratio of 64.4% as of Q1 2026, it stands head and shoulders above the other major Eurozone economies.
It is difficult for investors to have confidence in any country with an elevated debt-to-GDP ratio and high recurring annual deficits that propel their debt ever higher. Spain has been making progress and could continue to do so, but investors are losing patience with France and Italy. With geopolitical risks forcing governments to sharply increase defense spending, the fiscal flexibility of European governments is narrowing, and bond investors are demonstrating elevated anxiety.
As I argued in my mid-year outlook, investors are increasingly questioning which developed-market government bonds still serve as safe havens. In my opinion, they are wise to do so.
Important Information
Published on 07 October 2026.
1 Though the convergence is not nearly as close to the levels of the early 2000s, as recently as 27 January 2026, spreads for 10-year bonds issued by Spain, France, and Italy were only 37 bps, 56 bps, 57 bps above the comparable German 10-year yields, respectively.
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