U.S. Treasury Yields Fall Near One-Month Lows as French Political Unrest Widens Euro Spreads

U.S. Treasury yields eased toward one-month lows on Monday, influenced by cautious central bank commentary and falling oil prices, while a sell-off in French government debt accelerated amid significant civil unrest, causing sovereign bond spreads in the eurozone to widen.

U.S. Yields Retreat on Fed Pause Bets

The benchmark 10-year Treasury yield fell to 5.079%, consolidating near its lowest level in nearly a month. The policy-sensitive two-year Treasury yield also declined, slipping to 4.717% as investors increased bets on a pause in the Federal Reserve's monetary tightening cycle.

Sentiment in the fixed-income market was shaped by public remarks from Federal Reserve Governor Kevin Warsh, who affirmed the central bank's commitment to price stability but declined to provide forward guidance on future policy moves. According to the CME Group’s FedWatch tool, money markets are now pricing in an 87% probability that the Fed will hold interest rates steady at its upcoming meeting on October 28. A 2.3% drop in crude oil prices further tempered inflation fears, adding to the downward pressure on yields.

French Debt Sell-Off Widens Spreads

In contrast to the rally in U.S. Treasuries, European government bond markets showed significant divergence. While Germany’s benchmark 10-year Bund yield remained stable at 3.412%, French government bonds (OATs) experienced a sharp sell-off.

Ad

• The policy-sensitive two-year French yield rose to a one-week high near 3.603%.
• The spread between French and German 10-year yields widened as investors demanded a higher risk premium to hold French debt.

This repricing follows one of France's most severe periods of civil unrest in decades over the weekend, sparked by protests over living costs. The political instability is compounding investor concerns over France's fiscal position, which includes a budget deficit projected at 5.4% of GDP.

Central Bank Outlook

European Central Bank President Christine Lagarde noted on Saturday that the recent surge in global bond yields is already tightening financial conditions, which will likely curb economic growth and inflation in the eurozone. However, she warned that this also makes it more difficult for consumers to handle energy price shocks.

Despite the market-driven tightening, money markets widely expect the ECB to deliver another 25-basis-point rate hike in December. Such a move would lift the benchmark policy rate to 2.75%, a level that central bank officials consider restrictive to economic activity.