France’s 10-year bond yield was on track for its biggest quarterly increase in nearly four decades and its sharpest monthly rise in almost four years, highlighting the scale of September’s global debt-market selloff, Reuters reported.
Eurozone yields retreated from this week’s peaks on Wednesday as investors became more cautious about the prospect of aggressive central-bank rate increases. However, hotter-than-expected inflation readings from France, Germany and Italy limited the decline.
Bond yields have surged this month as prices fell. Rising energy costs have fuelled inflation concerns, while the artificial-intelligence boom has supported economic growth, prompting investors to prepare for interest rates to remain elevated for longer.
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France faces additional pressure from its large fiscal deficit, while political manoeuvring ahead of next year’s presidential election could complicate efforts to reduce it.
The yield on France’s benchmark 10-year OAT was last up 2 basis points at 4.84%, after touching 4.8485%—its highest level in 18 years.
The yield has climbed 66.5 basis points in September, its biggest monthly increase since late 2022, and has underperformed comparable debt from other major eurozone economies.Since the beginning of July, the yield has risen 119 basis points, putting it on course for its largest quarterly jump since 1987.
Higher borrowing costs are beginning to constrain France’s fiscal position. The government said late on Tuesday that it plans to sell a record €340 billion of bonds next year. Interest expenses are now projected to be €5 billion higher in 2026 and €7 billion higher in 2027 than forecast a year ago.
“Higher interest rates are therefore becoming a source of fiscal deterioration, making it even more difficult to stabilise public debt,” said Charlotte de Montpellier, a senior economist at ING.
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The gap between French and German 10-year borrowing costs widened to 125.90 basis points, its highest level since June 2012.
“An improvement in the situation in the Middle East and a decline in energy prices could bring European interest rates down. But in the absence of a political or fiscal improvement in France, the potential for a meaningful tightening of the spread appears limited,” de Montpellier said.
The spread between Italian and German 10-year yields widened to 102.11 basis points, its highest level since March 23.
Inflation limits bond-market optimism
Germany’s 10-year yield, the eurozone benchmark, fell 4 basis points to 3.57%, retreating from 3.65% on Monday—its highest since 2009, according to the Reuters report.
Stabilising oil prices, albeit at elevated levels, and central bankers pushing back against expectations of rapid and sustained rate increases helped calm markets. Analysts said quarter-end portfolio rebalancing may also have contributed to the move.
New York Federal Reserve President John Williams said on Tuesday that the US central bank had time to assess economic data before deciding when to raise rates again, prompting traders to reduce bets on an October increase.
European Central Bank policymaker Peter Kazimir said the ECB, which has raised rates twice this year, could afford to remain flexible. His comments echoed a similar message from ECB President Christine Lagarde on Monday.
European two-year yields, which are more sensitive to ECB policy expectations, fell more sharply than longer-dated yields. Germany’s two-year yield dropped nearly 9 basis points to 3.19%. However, European inflation data suggested that pressure on the ECB may continue to build.
Inflation accelerated sharply across five German states in September. France’s harmonised inflation rate rose to 3.4% from 2.6% in August, while Italy’s increased to 4.1% from 3.2%.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)