French yields rising, spreads widening

French government bond yields rose further yesterday and the 10-year spread over equivalent German bonds widened out again, to around 160bps, almost double the yield differential that prevailed at the beginning of September. There has been some limited ‘contagion’ to Italian bonds over this period, with the 10-year spread over Germany widening out by around 35bps to circa 115bps, the latter still some considerable distance from the spread of 500-600bps that prevailed at the height of the Euro area debt crisis in 2011-2012. The widening out of French-German spreads since early September has weighed on the euro-dollar exchange rate, which has fallen by almost 4 cents, though a large chunk of this decline reflects a hawkish repricing of Fed rate hike expectations. Still, the more French spreads widen out, the greater the risk of greater contagion, in turn increasing the risk of a further fall in EURUSD. The latter is trading at around $1.1245 this morning, a touch firmer than yesterday morning, while EURGBP continues to hover just below £0.84. Sterling is also a little firmer against the dollar, trading just north of $1.34.

UK government bond yields edged lower yesterday, notwithstanding stronger than expected inflation data for September, while US and German yields ended marginally higher on the day. French 10-year yields rose by almost 10bps, closing at over 5% for the first time since 2002, while the spread over German bonds moved out by another 6bps or so (to around 160bps); it is more of the same this morning, with yields nudging higher and spreads widening out further. In equity markets, Asian stocks were mostly in the red overnight, despite positive earnings results from Meta after the US close. European indices have opened almost 1.5% lower this morning (reversing the gains they chalked up yesterday), while the futures market points to a weak opening for US stocks later today as well.

ECB member Kazaks says inflation is “way above target”, so some further “(monetary) policy tightening might be necessary”, though he also notes that the recent “jump in bond yields…will slow economic growth, which in turn might curb some of the inflationary pressures.” The market expects the ECB to stay on hold at next week’s policy meeting, though it is almost fully pricing in a 25bps increase in December and about 75bps of hikes in total by September next year.

Looking to the day ahead, it is another quiet one in terms of economic data releases, with consumer confidence due in the euro area and weekly jobless claims scheduled in the US. There are also a few ECB members due to speak during the course of the day.