Euro zone bond yields ease, France/Germany spread narrows from 15-yr high
Euro zone bond yields fell and the spread between French and German 10-year yields narrowed to 135 bps from 158 bps on Friday. Markets are pricing an 80% chance of another ECB rate hike by year-end.
French-German 10-year yield gap narrows to 135 bps from Friday's 15-year high Markets price 80% chance of another ECB rate hike by year-end Le Pen set to unveil €25 billion annual spending cuts LONDON, Oct 6 — Euro zone bond yields fell on Tuesday and the spread between French and German 10-year yields narrowed further from its peak of last Friday as investors assessed whether the recent surge in France's risk premium had gone too far, too quickly.
French borrowing costs have surged in recent weeks and the yield gap over Germany expanded to its widest level since the euro zone debt crisis in 2011 on Friday, due to worries about the country's deteriorating fiscal situation ahead of next year's presidential election. The selloff has eased slightly this week with the yield gap, measuring the risk premium investors demand to hold French debt over German, now at 135 basis points (bps). It touched its highest level in 15 years on Friday at 158 bps.
France is set to formally submit its 2027 budget on Tuesday, while far-right presidential candidate Marine Le Pen is scheduled to present plans on Tuesday to cut government spending by €25 billion ($28 billion) a year. "France has never really demonstrated a consistent commitment to fiscal consolidation. And that now needs to happen," said Guillermo Felices, global investment strategist for fixed income at PGIM. " French Finance Minister Roland Lescure said the turbulence in the bond market had not reached the point to begin thinking about using policy tools from the European Central Bank to stabilise borrowing costs.
439%. Ecb Hike Expectations Scaled Back The ructions in the bond market have prompted investors to trim their expectations for interest rate hikes from the ECB. Markets are now pricing in an 80% chance of another rate hike by the end of the year. They had been pricing in at least three more hikes by the March meeting but now are just fully pricing in one hike and around an 80% chance of a second.
ECB chief economist Philip Lane said on Monday that the recent surge in borrowing costs was a factor that could weigh on the economy by curbing demand, limiting how much the ECB needs to do to quell price pressures. "On balance, most ECB members sound less hawkish, but are keeping commentaries about bond markets to a minimum," said Christoph Rieger, head of rates and credit research at Commerzbank. 037%. com)