Government Bonds: Is the “Risk-Free” Investment Becoming a Myth?

Read the article from Les Echos here

Long considered a benchmark for safety, government bonds are now facing a new reality: some major French companies are borrowing at rates lower than those charged by the French government. This phenomenon reflects market concerns about public finances and raises questions about the very concept of a risk-free investment.

When Companies Inspire More Confidence Than the Government

In the bond market, one rule has long served as a benchmark for investors: sovereign debt from governments deemed the most creditworthy forms the foundation of the least risky investments. The French government, thanks to its ability to collect taxes, the depth of its economy, and the liquidity of its bonds, has thus traditionally enjoyed favorable financing terms.

But this hierarchy is beginning to fade. According to data reported in the Échos article, 17 out of 40 CAC 40 companies were borrowing at rates lower than those of France. On the secondary market, 38% of high-quality (investment-grade) French bonds were trading at yields lower than those of comparable Treasury bonds (OATs), representing some 215 billion euros in securities.

Among the examples cited are LVMH, Sanofi, and TotalEnergies, whose 10-year bonds had yields lower than those of OATs with the same maturity. Air Liquide had also benefited from more favorable financing terms than the government during a bond issuance.

These figures provide a snapshot of the market as of the date of publication of the original article. They should not be interpreted as current quotes: bond yields fluctuate daily based on interest rates, economic expectations, and investor decisions.

Nevertheless, the phenomenon remains significant. It shows that the markets no longer systematically view the French government’s creditworthiness as the absolute benchmark for credit risk.

Why have government bonds long been considered low-risk?

To understand this shift, it is helpful to revisit the historical role of sovereign debt in financial markets.

A bond is a loan granted to an issuer, who commits to paying interest and repaying the principal according to the agreed terms. The issuer can be a company, a local government, or a national government.

In France, Treasury bonds (OATs) are the government’s primary medium- and long-term borrowing instrument. Their maturities can range from two to fifty years.

Three characteristics explain their historical status as a relatively defensive investment:

- The government’s ability to raise funds: Unlike a company, a government has the power to levy taxes and mobilize public resources. This ability helps strengthen its capacity to meet its financial obligations, even though it is neither unlimited nor sufficient to eliminate all risk of default.

- the liquidity of sovereign markets: OATs benefit from a deep and organized market, which generally allows investors to buy and sell securities under relatively favorable conditions. This liquidity is a significant advantage, particularly for institutional investors.

- Their role as a benchmark in financial valuation: Sovereign bonds issued by countries considered the most creditworthy traditionally serve as a benchmark for assessing the expected return on other investments. The sovereign rate is thus often used as an approximation of the so-called “risk-free” rate in financial models.

The French Financial Markets Authority (AMF) notes, however, that this term does not mean that an investment is completely risk-free. Rather, it refers to a benchmark considered particularly safe in terms of credit risk.

A Challenge to the French Model

While some French companies borrow at lower rates than the government, this is not necessarily because they are inherently safer under all circumstances. It is, above all, a sign that the markets assess their respective risks differently.

On the one hand, large international conglomerates often have solid balance sheets, recurring cash flows, geographically diversified operations, and the ability to generate revenue beyond the French market.

On the other hand, the French government faces high public debt, persistent deficits, and political uncertainty that could complicate budgetary decisions. These factors may lead investors to demand an additional return for holding its bonds.

The state of public finances remains a key factor. According to INSEE, French public debt as defined by the Maastricht criteria stood at 3,595.5 billion euros at the end of the second quarter of 2026, or 119% of gross domestic product (GDP).

Furthermore, Standard & Poor’s downgraded France’s sovereign rating from AA- to A+ in October 2025. The A+ rating was maintained in the decision dated May 29, 2026, with a stable outlook.

These factors do not mean that France is on the verge of default. They do, however, reflect a more critical assessment of its fiscal trajectory by the markets and credit rating agencies.

A Lower Yield Does Not Necessarily Mean Lower Risk

Comparisons of bond yields should, however, be interpreted with caution.

A bond’s yield does not depend solely on the probability that its issuer will repay its debt. It also reflects market conditions, the bond’s maturity, the security’s liquidity, and investor demand.

When a highly rated company issues a 10-year bond, it may benefit from strong demand, particularly if investors are seeking predictable income and wish to diversify their exposure to sovereign debt.

Conversely, if investors are concerned about a government’s fiscal trajectory, they may demand a higher return to continue financing it.

This mechanism results in an increase in the risk premium—also known as the spread—relative to a benchmark considered safer. In the eurozone, the spread between French and German bond yields serves as a key indicator of perceptions of French sovereign risk.

A clarification is therefore in order: a company that borrows at a lower cost than the government is not automatically less risky in every respect. Its credit risk, liquidity, sensitivity to economic conditions, and earnings outlook must be examined separately. Similarly, a meaningful comparison requires comparing bonds with comparable maturities, denominated in the same currency, and having similar characteristics.

Finally, it is important to distinguish between the rate obtained when a bond is issued on the primary market and the yield observed on the secondary market, where already-issued securities are traded among investors.

Are government bonds still a defensive investment?

The answer now depends more on the specific government in question, the bond’s maturity, and the investment horizon.

Sovereign bonds retain significant advantages: they can provide predictable income, diversify a portfolio, and help manage certain risks, particularly when issued by governments with high creditworthiness.

However, they also expose investors to several risks:

- Interest rate risk: When market interest rates rise, the price of a fixed-rate bond generally falls. Selling the bond before maturity may therefore result in a capital loss. - Credit risk: The issuer’s financial situation may deteriorate, raising doubts about its ability to meet its obligations. - Inflation risk: Even if the principal is repaid in full, inflation can reduce the purchasing power of the principal and interest received. - Liquidity risk: Depending on the securities and market conditions, reselling may be difficult or may require accepting an unfavorable price.

The AMF notes that these risks apply to both government bonds and corporate bonds, with varying levels depending on the issuers and the characteristics of the securities.

As an economic indicator, the yield on the French 10-year OAT reached approximately 4.90% on October 2, 2026, according to market data reported by the Wall Street Journal. This level reflects changes in France’s borrowing conditions, but it is not sufficient on its own to determine whether OATs represent an investment opportunity.

What Are the Implications for Investors?

For wealth management investors, this trend serves as a reminder that it is preferable to consider the balance between return, risk, and investment horizon rather than relying solely on the issuer’s category.

Government bonds can still play a relevant role in an asset allocation, but selecting them now requires a more detailed analysis of the economic and fiscal environment. The maturity of the securities, their yield to maturity, the issuer’s credit quality, and the implications of a potential early sale must all be taken into account.

Corporate bonds, for their part, can offer diversification opportunities. However, they are not necessarily a better choice than government bonds: their credit risk can rise rapidly in the event of a downturn in business activity, increased debt, or refinancing difficulties.

Diversification across issuers, sectors, and maturities therefore remains essential. This helps limit dependence on a specific risk without eliminating the portfolio’s overall risk.

Another consideration is the method of holding the investment: holding a bond directly until maturity, investing in a bond fund, or holding a unit of account within a life insurance policy all involve different terms regarding valuation, liquidity, and exposure to losses.

Conclusion: The Real Challenge Is to Redefine the Concept of Safety

The fact that certain French companies borrow at rates lower than those of the government is a significant signal. It reflects a shift in the perception of sovereign risk and serves as a reminder that a borrower’s credit quality cannot be determined solely by its public or private status.

However, it would be an overstatement to conclude that government bonds have lost their investment appeal or that corporate bonds have systematically become safer.

The concept of a “risk-free” investment should be understood as a relative benchmark, not as an absolute guarantee. In an environment marked by public debt, political uncertainty, and interest rate volatility, prudence requires analyzing each investment based on its specific characteristics, its holding period, and its role within a diversified asset allocation.

For the investor, the challenge is therefore not simply to determine whether the government or a company is borrowing at the lowest rate. It is to understand what risk they are willing to accept in exchange for the proposed return.