Eurozone Bond Yields Climb as French Fiscal Concerns Return Ahead of Fed, ECB Decisions

Eurozone government bond yields pushed higher on Wednesday, as a brief rally in French debt faded and investors turned their attention to upcoming policy decisions from the U.S. Federal Reserve and the European Central Bank. The move reflects renewed market scrutiny of fiscal sustainability in the bloc ahead of the central bank meetings.

French Fiscal Worries Resurface

The yield on France’s benchmark 10-year government bond (OAT) rose to 4.965%, giving back some of the gains from Monday's relief rally. That rally followed Moody's decision to affirm the sovereign's Aa3 rating, but the focus has since shifted back to France's underlying fiscal challenges.

Investors remain cautious amid President Emmanuel Macron’s difficulties in passing fiscal consolidation measures to address a budget deficit of 5.4% of GDP. "Long-term fiscal sustainability is becoming an increasingly important consideration for investors," said Louis Gargour, CIO at Market Securities Wealth, in a comment cited by Investing.com. "Markets are increasingly focused on fiscal discipline and governments’ ability to refinance large debt stocks without materially higher borrowing costs."

German Bunds Weaken on Economic Data

Across the Rhine, German government debt also saw yields rise. The benchmark 10-year Bund yield edged up to 3.382%, while the policy-sensitive two-year yield climbed to 3.082%. The move came as fresh data pointed to persistent economic headwinds.

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The GfK/NIM forward-looking consumer climate index for Germany slipped to -30.8 for November from -30.6 in October, signaling that sticky inflation and weak income expectations continue to weigh on household sentiment. This reinforces concerns about stagflationary pressures in Europe's largest economy.

Central Bank Policy Paths in Focus

Markets are now positioned for key central bank announcements. The Federal Reserve is widely expected to hold its federal funds rate steady at 3.75%-4.00% later Wednesday, but interest-rate markets are pricing an 80% probability of a 25-basis-point hike in December. Investors will closely watch Chair Jerome Powell's press conference for signals on future policy.

The European Central Bank is expected to pause its rate-hiking cycle on Thursday, leaving its deposit facility rate at 2.50%. However, with headline inflation still at 3.8%, traders will scrutinize President Christine Lagarde’s commentary for clues on whether another rate increase could come in December.