French Bond Yields Retreat as Oil Falls, Fiscal Concerns Mount

France’s 10-year OAT yield climbed towards 4.9% as investors increased bets on further European Central Bank interest rate hikes, and oil prices rebounded from more than two-month lows after US President Donald Trump said that Washington did not need a deal with Iran. French government bonds also remained under pressure from domestic fiscal concerns, with investors keeping a close eye on the country’s public finances ahead of next year’s presidential election. ECB euro short-term rate (€STR) forwards now indicate that markets expect the deposit rate to rise from its current 2.5% to 3.25% by late 2027, up from 3% priced in last week. They also point to a rate of 2.74% by December 2026. Meanwhile, stronger-than-expected US inflation data released on Tuesday pushed Treasury yields higher and reinforced expectations of further Federal Reserve tightening. Markets are now fully pricing in a Fed rate hike by December, with the possibility of a larger 50bp increase also being considered.

France’s 10-year OAT yield edged lower to around 4.75% after Tuesday’s sharp rise, as investors struggled to find direction amid a relatively quiet Eurozone economic calendar. Brent crude prices also paused their recent decline following shipping attacks in the Strait of Hormuz, while markets continued to assess stronger-than-expected US inflation data, which reinforced expectations of further Federal Reserve tightening in December and raised the possibility of a 50-basis-point rate hike. Meanwhile, France’s ongoing political and fiscal difficulties, alongside uncertainty over the potential early departure of ECB President Christine Lagarde, continued to weigh on sentiment across European markets. On the monetary policy front, ECB Chief Economist Philip Lane signaled that another rate increase in December could be necessary, joining a growing number of policymakers advocating for a third hike this year.

France's 10-year OAT yield rebounded to 4.75%, tracking higher US Treasury yields as stronger-than-expected US inflation data and hawkish comments from Federal Reserve Governor Christopher Waller heightened expectations of further monetary tightening. Waller signaled the possibility of additional rate increases, while October's elevated inflation reinforced expectations of further Fed tightening in December, bringing a potential 50-basis-point hike into focus. Meanwhile, France's ongoing political and fiscal challenges, coupled with uncertainty surrounding ECB President Christine Lagarde's potential early departure, continued to weigh on sentiment across European bond markets. On the monetary policy front, ECB Chief Economist Philip Lane suggested that another rate increase in December may be necessary, adding to a growing number of policymakers advocating a third hike this year.