Euro zone bond yields ease from multi-year highs; France/German spread narrows

French-German 10-year yield gap tightens below 130 bps from Friday's 15-year high Markets price 85% chance of another ECB rate hike by year-end French budget in focus, Le Pen targets deficit reduction (Updates for late European morning trading) By Samuel Indyk 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 128 basis points. 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 presented plans on Tuesday to reduce the country's public deficit to 3% by 2030. "The French politicians have realised how difficult the situation is," Jens Peter Sørensen, chief analyst at Danske Bank, said. " 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. 452%.

525%. 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, while a third straight daily fall in oil prices has also tempered the need for additional tightening. 4% on Tuesday to below $98 a barrel on signs that exports from the Middle East were increasing closer to pre-war levels. Meanwhile, ECB officials, including chief economist Philip Lane, have started to question the need for higher interest rates if rising bond yields impact growth and quell price pressures.

"On balance, most ECB members sound less hawkish," said Christoph Rieger, head of rates and credit research at Commerzbank, who noted that policymakers are still keeping comments on the bond market to a minimum. Markets are now pricing in an 85% chance of another rate hike by the end of the year. Futures had implied at least three more hikes by the March meeting but now markets are fully pricing in fewer than two quarter-point rate rises. 072%.

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