Euro zone bonds find some respite, yields down from multi-year highs
TLT•Euro zone bond yields fell on Tuesday, and the French-German 10-year yield spread narrowed to 135 basis points from a 15-year high of 158 basis points on Friday. Markets priced an 80% chance of another ECB rate hike by year-end.
1. Yields ease
France’s 10-year bond yield fell 7 basis points to 4.792%, while Germany’s 10-year yield dropped 5 basis points to 3.439%. The spread between the two yields narrowed to 135 basis points, down from 158 basis points on Friday.
2. Budget and rate outlook
France was set to submit its 2027 budget on Tuesday, while Marine Le Pen was scheduled to present plans for €25 billion in annual government spending cuts. Markets had scaled back ECB rate-hike expectations: they priced an 80% chance of another increase by year-end, after previously pricing in at least three further hikes by the March meeting.
3. Fiscal concerns
The recent French bond selloff followed concerns about the country’s fiscal situation ahead of next year’s presidential election. Finance Minister Roland Lescure said market turbulence had not reached the point of considering ECB tools to stabilize borrowing costs. ECB chief economist Philip Lane said higher borrowing costs could weigh on demand and limit the need for further action to curb price pressures.
