The shock from turmoil in French debt has yet to show up in the country’s market for short-term funding, signaling a broad credit crisis is off the cards for now.

While the sharp selloff in France’s sovereign bonds has raised fears of contagion, behind the scenes traders are seeing no signs of stress in the ability to get cash in the repo market. That’s both good and bad — it shows the financial system’s plumbing is working, but also that things could still get a lot worse if cracks do appear.

With six months to go before the country’s pivotal presidential elections next year, hedge funds are not taking any chances and have been offloading bonds, exacerbating the turbulence. Any evidence of a deterioration in their ability to get repo funding to cover their positions — as seen when the pandemic broke — would herald a much more serious situation.

“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,” said Benoit Gerard, a rates strategist at Natixis. “That would be one of the early signals of something big happening on France.”Repo markets are where institutions borrow cash against government bonds to finance leveraged trades. They’ve grown in importance alongside hedge fund activity, making them a key indicator for signs of stress and a focus for regulators seeking to avoid the next crisis.

France’s central bank warned in a June financial stability report that rising non-bank participation, high leverage and concentration among a small number of firms were increasing systemic risks. A handful of major banks sit at the center of repo intermediation, and more of their funding is flowing to hedge funds running “highly leveraged arbitrage strategies,” it said.

That structure could amplify stress, trigger “sharp price swings” and create “contagion channels to the broader financial system” if liquidity dries up, the Banque de France said. In this case, the “unwinding of very concentrated levered trades” caused France’s bond spreads to blow out, according to Iain Stealey, chief investment officer at J.P. Morgan Asset Management.

While there’s also been heightened French repo activity over the past few weeks and a brief spike in repo rates, they have since calmed down to around 12 basis points, only slightly above the three-month average, according to the CME Group data. That’s the cost of depositing funds safely with a central bank versus lending and getting a French bond as collateral.

“The stability suggests it’s not a dash for cash,” said Rohan Khanna, head of European rates strategy at Barclays Plc.

Repo has stayed “anchored” as it reflects whether bonds can be financed against a haircut or margin calls over days, and “nobody is debating” the risk to French creditworthiness over the next week, said Glen Stone, head of trading and execution at institutional cash management platform TreasurySpring. Meanwhile the selloff in bonds instead reflects fiscal risk over coming years, he said.

The real test would be if further credit rating downgrades took France below the thresholds used in repo collateral design, Stone said.

“Whilst this looks unlikely in the immediate term, it would mechanically shrink the pool of lenders able to accept French collateral and raise the cost of holding the bonds, at which point repo pressure could start feeding back into the bond market,” he said.

Fitch Ratings downgraded France last year to A+, a level that rival S&P Global Ratings has since matched. Moody’s Ratings still has a higher credit score on the country, but is scheduled to offer a possible update later this month.

Fitch’s head of western Europe sovereigns Federico Barriga-Salazar described France’s latest budget proposal for 2027 as a meaningful attempt to tame the country’s deficit, but warned it risks adverse consequences if it doesn’t pass. The International Monetary Fund also said France must ensure “timely approval” of its budget bill to bolster market confidence.

Debates over the budget are underway this week in the country’s fractured parliament. Opposition groups that have twice toppled prime ministers over such plans in the last two years are reluctant to compromise. Even if it’s approved this time, worries about the country’s finances are likely to drag on through the 2027 presidential election and beyond.

That leaves plenty of scope for things to flare up again in markets. If investors begin pulling back from using French bonds as collateral that would signal a serious crisis, according to Deborah Cunningham, chief investment officer of the $680 billion liquidity markets business at Federated Hermes. That’s a point the market is not close to yet.

“It’s not full-blown, but definitely a crisis of confidence,” Cunningham said. “The full-blown crisis would be when you start to see some of the more quantitative statistics reflecting what is more sentiment at this point.”