France’s Repo Market Holds Steady Amid Bond Selloff

France’s repurchase agreement, or repo, market has remained stable while hedge funds reduce their holdings of French government bonds. The market is used by financial institutions to borrow cash against government bonds used as collateral.

Repo rates have settled at about 12 basis points above the European Central Bank’s deposit rate, according to CME Group data. That is only slightly above the three-month average, after a brief increase during recent market volatility.

A sharp rise in repo rates or a shortage of lenders could indicate that investors are struggling to obtain funding. It could also force leveraged hedge funds to sell more bonds.

Benoit Gerard, a rates strategist at Natixis, described the repo market as an early indicator of stress in the bond market. “The early stage of a real bond crisis will occur on the repo market because this is where a lot of the business is going on,” he said. “That would be one of the early signals of something big happening on France.”

Hedge funds have reduced their exposure to French sovereign debt amid uncertainty over the country’s fiscal position and political outlook before the 2027 presidential election. The selling has widened the gap between French and other euro-area government bond yields and increased price volatility.

Rohan Khanna, head of European rates strategy at Barclays, said stable repo markets indicated that investors were not facing a broad scramble for cash. The market conditions point to concerns about France’s longer-term public finances rather than an immediate shortage of financing, he said.

The Banque de France warned in its June financial stability report that increased participation by non-bank financial institutions, high leverage and concentrated trading could amplify stress in sovereign debt markets and spread it to other parts of the financial system.

The central bank also highlighted a small group of major banks that provide financing to hedge funds using highly leveraged arbitrage strategies. Iain Stealey, chief investment officer at J.P. Morgan Asset Management, attributed part of the recent widening in French bond spreads to the unwinding of concentrated leveraged trades.

A disruption in repo funding could create a feedback loop. Falling bond prices could increase financing costs, prompting hedge funds to sell more bonds and putting further pressure on prices. A downgrade of France’s sovereign credit rating could reduce the number of institutions willing or permitted to accept French bonds as collateral.

Glen Stone, head of trading and execution at TreasurySpring, said a downgrade below key collateral-eligibility thresholds could shrink the pool of lenders and raise the cost of financing French government debt.

France is currently rated A+ by Fitch Ratings and S&P Global Ratings. Moody’s assigns the country a higher rating and is scheduled to review its creditworthiness later in October. Political divisions over France’s proposed 2027 budget have complicated efforts to reduce the government deficit.

Deborah Cunningham, chief investment officer of Federated Hermes’ $680 billion liquidity-markets business, described the situation as “a crisis of confidence rather than a systemic funding breakdown.” She said a broader crisis would be reflected in quantitative measures of wider financial stress.