As of 0855 GMT, experts at Jefferies predict that French government bonds (OATs) are poised for greater volatility and rising pressure as Prime Minister Francois Bayrou approaches a crucial vote of confidence regarding his fiscal policies. The government currently lacks an absolute majority and is reliant on backing from both the moderate left and right factions. Analyst Mohit Kumar warns, “Any effort to trim public spending is expected to invite significant resistance from the various political parties involved.” Jefferies has maintained a position of being short on French bonds compared to their Italian counterparts, a strategy they continue to hold. Meanwhile, the yield spread between 10-year OATs and Bunds has widened by roughly 5 basis points, now sitting at 78 basis points, as noted by Tradeweb.
Segmented Yield Spreads between French OATs and German Bunds
At 0803 GMT, it’s reported that French OATs are lagging behind their eurozone relations as PM Bayrou prepares for a parliamentary vote on budget reductions scheduled for September 8. Analysts at Natixis indicate that the widening spreads between the 10-year French OAT and the German Bund reflect a significant probability of a non-confidence vote ahead. With the government holding a relative majority, the outcome hinges on whether the opposition parties will choose to abstain. According to Natixis, “The pressure on OATs is expected to increase, causing them to underperform against other European government bonds.” Currently, the yield spread between 10-year OATs and Bunds has widened by 4 basis points, now at 77 basis points, while the yields on other eurozone government bonds have decreased compared to their German equivalents.
Impending Bond Market Turmoil
At 0619 GMT, market analyst Hauke Siemssen from Commerzbank Research raises concerns that deteriorating investor sentiment could exacerbate the existing bond market selloff. “It remains uncertain whether the unsettling trends at the ultra-long end of the market will shift, especially considering Trump’s recent actions that increase the U.S. risk premium,” seems to be his main commentary. On Monday, trading was subdued due to a bank holiday in the U.K, which likely fueled the bond selloff when markets reopened. The 10-year German Bund yield dipped by 3.7 basis points to 2.726%, according to LSEG.
U.S. Treasury Yields Adjust Following Political Maneuvers
Adjustments in U.S. Treasury yields were similarly noted as of 0557 GMT, with yields for maturities of five years and longer climbing during Asian trading. This spurred following President Trump’s decision to attempt to replace Federal Reserve governor Lisa Cook due to allegations of misleading mortgage information. Analyst Asger Wilhelm Dalsjo from Danske Bank states, “Such an unprecedented move raises concerns over the Fed’s independence, while also allowing Trump an opportunity to influence the central bank’s direction further.” The markets reacted by shifting Treasury yields in line with anticipated policy fluctuations and over Fed’s uncertain trajectory—the yield on 2-year Treasuries fell by 1.5 basis points to 3.714%, while the 10-year yield increased by 2.7 basis points to 4.301%. Not to overlook, the 30-year yield also saw a rise, reaching 4.929% with a 4 basis point gain.
Yield Spreads Charting a Narrow Path in U.S. and German Markets
As observed at 0533 GMT, the spread between 10-year U.S. Treasuries and German Bunds has seen a tightening trend lately. Both the U.S. and German yield segments between two to ten years have exhibited steepening behavior, per analysts Birgit Henseler and Christian Reicherter from DZ Bank. They elucidate that the steepness in Germany’s yield curve is a reflection of increased economic confidence following years of stagnation. In contrast, movements in the U.S. yield curve are notably influenced by market speculations concerning upcoming Federal Reserve interest rate cuts. On Monday, this 10-year yield spread between U.S. Treasuries and German Bunds settled slightly below 152 basis points, as reported by LSEG.
Anticipating Adjustments in the Japanese Yield Curve
Also noteworthy, Morgan Stanley MUFG forecasts a steepening in the 10- to 30-year Japanese government bond yield curve, based on insights from strategists Koichi Sugisaki and Hiromu Uezato. They suggest, “While there’s speculation about a potential Bank of Japan rate hike approaching, we believe hawkish expectations may lessen if forthcoming U.S. labor data shows negative trends.” M.U.F.G. has kept a relatively bullish view on 10-year JGBs while adopting positions that capitalize on steepening from 10-30 years any substantial flow activity as the month progresses. Currently, the yield on 10-year JGBs maintains at 1.617%, with 30-year yields dropping by 2 bps to 3.193%, according to LSEG.
Long-Term Dysfunctionality of U.S. Debt Markets?
Lastly, at 0122 GMT, Joe Capurso from Commonwealth Bank of Australia noted Trump’s actions against Fed Governor Lisa Cook have further dented the Fed’s neutral standing, stating the U.S. president might sway short-term interest rates. Nonetheless, long-term bond market trajectories are also acutely influenced by both domestic and foreign investors, notably affecting rates on consumer and business loans. “It’ll be essential to monitor the bond market closely. A drastic selloff could force Trump to reconsider overstepping with regards to the Fed,” Capurso cautions.
