The US 10-year yield is trading at 5.331%, down about 3.4 basis points from yesterday's peak of 5.365%, its highest level since April 2002. The dollar remains steady near an 18-month high, while French bonds resume their rally after a brief pause. This follows a hawkish Federal Reserve meeting, a strong 10-year bond auction, and a surge in oil prices on Pentagon news, ahead of tonight's 30-year bond auction.
US bonds: Yields are declining slightly, not significantly.
Yield: 5.331%, up about 2.1 basis points from Monday's close (5.31%) and down about 3.4 points from Wednesday's peak.
The auction: The $39 billion auction was strong, with the highest yield since November 2000 according to preliminary results. Yields have fallen from their peak, but have not returned to last week's levels.
Minutes: A majority of Fed members felt that a further rate hike was likely appropriate before the end of the year, and markets were pricing in about 80% of a December hike.
Oil: Brent rose to $103.09 after news of US preparations for a possible resumption of the war, fueling inflation fears and limiting the decline in yields.
Foreign demand: Ray Dalio's warnings about declining demand for bonds from China and Japan remain in place, after China's holdings reached $618 billion, the lowest since 2008.
Dollar: Calm near the peak
The dollar index is holding near its 18-month high reached yesterday, without a new surge, after retreating from the peak as profit-taking occurred, according to FXStreet, despite the hawkish minutes. This calm, in our view, suggests that the market has priced in most of the anticipated rate hike and that the dollar is awaiting a new catalyst from either the US inflation data on October 14 or developments in the war.
French bonds: A brief respite and a return to pressure
Where are you standing now?
Yields: The French 10-year bond yield rebounded to around 4.83% yesterday, compared to 3.49% for the German bond, a difference of 134.4 basis points, and about 7 points higher than the previous session. Figures vary between sources (4.82% to 4.89%) depending on the clock.
The peak: Yields briefly touched above 5% on October 1, the highest level since July 2002, and the spread widened to around 159 basis points, the highest since 2011, according to Reuters. The current spread remains about 24 basis points below that peak.
The break: The yield had fallen 15 basis points to around 4.71% on Tuesday after Marine Le Pen presented a plan to reduce France's deficit to 3% of output by 2030 through €140 billion in net spending cuts, then the selling resumed on Wednesday, according to Investing.com, with the 30-year yield on British bonds reaching its highest level since 1998.
Comparison: France is now borrowing at about 50 basis points less than the United States (5.331%), but about 134 basis points more than Germany.
Why are you still under pressure?
The budget: Prime Minister Licorne's government is proposing cuts of around €54 billion to reach a deficit of 5% of GDP in 2027, down from 5.4% in 2026. The financial watchdog has warned that its assumptions are optimistic. Brussels is requiring each capital to finalize its budget by mid-October.
Politics: The budget threatens to bring down another government in a country heading towards presidential elections in 2027, while a parliamentary majority remains uncertain.
Ratings: Fitch and Standard & Poor's downgraded France's rating to A+ last year, and Morningstar DBRS changed its outlook on its AA rating to negative. Reports indicate a review by Moody's is expected in late October, but we have not been able to confirm the exact date.
Buyer base: Private investors are expected to absorb net issuances of around 7.5% of output in 2026, the highest in the sample, while price-insensitive buyers, such as insurance companies and pension funds, have reduced their presence, according to Hanno Lustig.
American contagion: The wave started in the United States after the Federal Reserve raised interest rates, and France was among the most affected, then the exit from it gained self-momentum, according to EU Insider.
What is the range of expectations? ING expects the spread to remain between 100 and 125 basis points in the coming months, while another scenario sees it narrow to around 75 points by the end of the year if the budget passes, and remain high or widen if it fails. Chris Attfield of HSBC said the European Central Bank is unlikely to intervene unless the market becomes disorderly, which has not yet happened. The governor of the Bank of France, Emmanuel Moulin, has confirmed that the country is not yet in an economic crisis.
What are we monitoring?
Tonight at 8:00 PM (Saudi Arabia time): Auction of 30-year US bonds ($22 billion), after their yield touched 5.724%.
Mid-October: The deadline for submitting budgets to Brussels, followed by the French parliament's discussion of the budget.
The gap between France and Germany: Will it exceed 135-140 points again or return to around 125?
October 14: US September inflation.
October 28: Federal Reserve decision.
Long-term yields remain near levels not seen in over two decades, the dollar is holding near its peak without easing, and France remains the weakest link in Europe: a one-day respite was not enough to reverse the trend. The most important determinant in the coming weeks will be Paris's ability to pass a budget that satisfies the markets, and the United States' ability to attract debt buyers with yields above 5.3%.
