Global Treasury yields ease amid rising France’s fiscal, political concerns

US 10-year Treasury note yield holds around 5.25% on Friday, pulling back from multi-decade highs as mounting concerns over France’s fiscal and political stability spurred demand for safe-haven assets. Despite this slight retreat, US yields remained near levels not seen since 2002. This persistent pressure is driven by ongoing expectations of further Federal Reserve (Fed) policy tightening.

European government bonds saw significant volatility, led by a sharp spike in French yields. France’s 10-year OAT yield surged past 4.9%, its highest mark since July 2002, following its largest quarterly increase in nearly 40 years. The rise came as the minority government introduced a budget deficit reduction plan, though the country's fiscal watchdog cautioned that the underlying economic forecasts were overly optimistic.

Analysts at Deutsche Bank note that recent market turbulence has compounded concerns over the policy outlook, with “financial stress” now feeding into “growing doubt whether central banks like the ECB could hike rates as aggressively as thought.” They argue that the tightening in financial conditions is increasingly seen as doing part of the ECB’s job, reinforcing market skepticism over the scope for further aggressive rate increases even as the Euro remains under pressure against the Dollar.

Compounding the issue, expectations for further ECB rate increases continue to push borrowing costs higher across the euro area, threatening debt sustainability for the bloc's most indebted nations. In contrast, Germany’s 10-year Bund yield slipped to around 3.47%, pulling back from 17-year highs as investors balanced safe-haven demand against projected ECB rate hikes extending through 2027.

In the UK, 10-year gilt yields eased below 5.38% after reaching peak levels last seen in July 2007. The pullback followed a temporary pause in rising oil prices, giving investors a breather after an intense bond market sell-off.

However, UK yields remain structurally elevated due to inflation concerns fueled by higher energy costs and stronger-than-expected economic growth, both of which support a "higher-for-longer" rate environment. Several Bank of England officials, including Governor Andrew Bailey, have expressed increased willingness to raise rates if energy prices continue to threaten the central bank's inflation target.

Meanwhile, Asian markets mirrored global trends as Japan’s 10-year government bond yield slipped below 3.1%, backing off from 30-year highs in step with the broader global retreat in yields. However, Japanese bond yields may continue to find strong underlying support from robust local economic data. Notably, Tokyo’s core inflation rose 2.7% in September, topping the Bank of Japan’s (BoJ) 2% target for the first time in nine months and keeping upward pressure on domestic borrowing costs.