A measure of French bond risk reached one percentage point for the first time in 14 years, signaling growing investor caution due to the country's large budget deficit and political uncertainty. The additional yield on French 10-year bonds over German counterparts hit 103 basis points Friday, its highest level since 2012. This underperformance reflects long-standing concerns over France's fiscal health.

On Thursday, the government announced it would miss its deficit target, stating difficult spending cuts are needed to narrow the gap by 2027. Finance Minister Roland Lescure said Friday's next year's deficit goal is "both ambitious and realistic." While the spread is elevated, strategists note attractive valuations offer little help without a stabilization catalyst. France struggles to control runaway public finances as economic growth slows and a fragmented parliament opposes austerity.

Risks for next year are acute as opposition parties resist compromising with President Emmanuel Macron's outgoing administration just seven months before elections. Investors demand more compensation to own French bonds amid these risks. The nation's 10-year yield surged to an 18-year high earlier this week before paring to trade around 4.50%.

In another sign of how cheap French bonds have become, the 10-year tenor now commands a 96 basis point premium over swap peers, the most since 2012. Rates strategists at Societe Generale SA warned a 120 basis point spread is within reach if political uncertainty increases. Macro Hive's head of rates strategy Antonio Del Favero warned wider levels could follow if opposition parties pass a no-confidence motion to topple Sébastien Lecornu's government, potentially driving the spread toward 130 basis points.