French and Italian debt risk premiums set for weekly decline
TLT•French 10-year yield spreads over German Bunds were set to fall 4.5 basis points for the week, while Italian spreads were on track to drop 5 basis points, after sharp increases the prior week.
1. Spreads retreat
The French spread was last at 136 basis points, down from a peak of 158.67 basis points the previous Friday, its highest level since November 2011. Italy’s spread was last at 107.64 basis points, compared with 129.74 basis points the previous Friday.
2. Rates and expectations
German 10-year government bond yields fell 3.5 basis points to 3.46%, while two-year yields dropped 3 basis points to 3.05%. Money markets priced the European Central Bank deposit rate at 2.72% by December, up from its current 2.50%, and the policy rate at 3.20% by late 2027.
3. Fiscal concerns persist
French bonds have faced selling pressure amid expectations of higher ECB rates and political uncertainty before the 2027 presidential election, raising doubts about France’s ability to fix its finances. Spreads for Spain, Portugal and the Netherlands had also widened in the week to October 2.
