French Bond Yields Ease as ECB Rate Hike Bets Retreat

France’s 10-year OAT yield eased to 4.85%, retreating slightly from a more than two-decade high, as markets scaled back expectations for European Central Bank tightening following a stall in the oil rally after US President Donald Trump said Washington would not attack Iran before the November midterm elections. Money markets now price the ECB deposit rate rising from 2.50% currently to 2.72% by December and 3.20% by late 2027. Before the recent widening in bond spreads, investors had anticipated roughly one additional rate hike in early 2027. French bonds remain under pressure from expectations of higher ECB rates and political uncertainty ahead of the 2027 presidential election, which have heightened concerns over France’s ability to rein in its public finances. The spread between French OATs and German Bunds narrowed slightly this week to around 135 basis points, down from 159 bps last Friday, its widest level since November 2011.

France’s 10-year OAT yield climbed above 4.9%, approaching the more than two-decade high above 5% reached late last week, as fiscal concerns persisted and oil prices returned to focus. French borrowing costs have risen amid elevated energy prices, inflation and rate expectations, while French debt has been hit particularly hard by concerns over the government’s ability to rein in spending ahead of the 2027 presidential election. Paris’ 2027 budget plan proposes unpopular spending cuts aimed at reducing the deficit to 5% of GDP next year, but a lack of credibility and a divided parliament could make the target difficult to achieve. Meanwhile, Brent crude rose as Iran intensified attacks on shipping in the Strait of Hormuz, reinforcing expectations for further rate hikes from major central banks. The ECB is now seen hiking twice more by March 2027, while swaps price around 75 basis points of tightening by the end of next year.

France’s 10Y OAT yield fell to 4.75%, retreating from the more than two-decade high above 5% reached late last week. The spread over German 10-year yields also narrowed as investors reassessed whether the recent surge in France’s risk premium had been too sharp and rapid. French borrowing costs have risen sharply in recent weeks, with the yield gap over Germany reaching its widest level since the 2011 Eurozone debt crisis amid concerns over France’s fiscal position ahead of next year’s presidential election. France is set to formally submit its 2027 budget today, while far-right presidential candidate Marine Le Pen is expected to outline plans to cut government spending by €25 billion a year. Elsewhere, bond-market turmoil has prompted investors to scale back expectations for further ECB rate hikes. Markets now price an 80% chance of another hike by year-end, while ECB Chief Economist Philip Lane said higher borrowing costs could curb demand and reduce the need for further tightening.