Investors are bracing for potential political turbulence next year, and a key gauge of French bond risk has once again hit a critical threshold.

The extra yield investors demand to hold French 10-year government bonds rather than equivalent German debt, known as the risk premium, has risen to 120 basis points, marking the first time since 2012.

Some analysts said this level had already been anticipated if fiscal and political uncertainty were to worsen further.

With only seven months remaining until the presidential election, opposition parties are unwilling to compromise with Emmanuel Macron's outgoing government, and the market is highly alert to this situation.

A poll released earlier this week showed that far-right candidate Marine Le Pen and her far-left rival Jean-Luc Melenchon are expected to reach the second round of the election runoff.

France's fiscal risks are also drawing continued attention. The French debt agency announced late Tuesday that, after accounting for buybacks, net issuance of medium- and long-term government bonds next year will total 340 billion euros, equivalent to 386 billion US dollars, a record high.

The government is set to release the 2027 budget plan on Thursday. With economic growth slowing sharply, parliament fragmented into rival blocs, and lawmakers resistant to austerity measures, France has struggled to bring its runaway public finances under control.

The 2026 fiscal deficit is projected to widen to about 5.4% of GDP, while the government's original target was a slight decline from 5.1% in 2025.

Political and fiscal volatility has weighed on French government bonds during the recent global bond selloff.

Over the past four months, the spread between French and German government bonds has nearly doubled, and long-term French borrowing yields have touched their highest level since 2002.