Global Treasury yields ease amid rising France’s fiscal, political concerns
- US 10-year yield holds at 5.25% as safe-haven demand offsets pressure from expected Fed rate hikes and growing debt concerns.
- French OATs surged on budget deficit plans, while German Bund yields eased to near 3.47%.
- Oil price pauses and tracking global trends pulled yields back from decades-long record peaks.
US 10-year Treasury note yield holds around 5.25% on Friday, pulling back from multi-decade highs as mounting concerns over France’s fiscal and political stability spurred demand for safe-haven assets. Despite this slight retreat, US yields remained near levels not seen since 2002. This persistent pressure is driven by ongoing expectations of further Federal Reserve (Fed) policy tightening.
European government bonds saw significant volatility, led by a sharp spike in French yields. France’s 10-year OAT yield surged past 4.9%, its highest mark since July 2002, following its largest quarterly increase in nearly 40 years. The rise came as the minority government introduced a budget deficit reduction plan, though the country's fiscal watchdog cautioned that the underlying economic forecasts were overly optimistic.
Analysts at Deutsche Bank note that recent market turbulence has compounded concerns over the policy outlook, with “financial stress” now feeding into “growing doubt whether central banks like the ECB could hike rates as aggressively as thought.” They argue that the tightening in financial conditions is increasingly seen as doing part of the ECB’s job, reinforcing market skepticism over the scope for further aggressive rate increases even as the Euro remains under pressure against the Dollar.
Compounding the issue, expectations for further ECB rate increases continue to push borrowing costs higher across the euro area, threatening debt sustainability for the bloc's most indebted nations. In contrast, Germany’s 10-year Bund yield slipped to around 3.47%, pulling back from 17-year highs as investors balanced safe-haven demand against projected ECB rate hikes extending through 2027.
In the UK, 10-year gilt yields eased below 5.38% after reaching peak levels last seen in July 2007. The pullback followed a temporary pause in rising oil prices, giving investors a breather after an intense bond market sell-off.
However, UK yields remain structurally elevated due to inflation concerns fueled by higher energy costs and stronger-than-expected economic growth, both of which support a "higher-for-longer" rate environment. Several Bank of England officials, including Governor Andrew Bailey, have expressed increased willingness to raise rates if energy prices continue to threaten the central bank's inflation target.
Meanwhile, Asian markets mirrored global trends as Japan’s 10-year government bond yield slipped below 3.1%, backing off from 30-year highs in step with the broader global retreat in yields. However, Japanese bond yields may continue to find strong underlying support from robust local economic data. Notably, Tokyo’s core inflation rose 2.7% in September, topping the Bank of Japan’s (BoJ) 2% target for the first time in nine months and keeping upward pressure on domestic borrowing costs.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.