France’s 10-year OAT yield climbed toward 4.8% as investors reassessed the likelihood of December rate hikes by both the Federal Reserve and the ECB, while persistent political and fiscal uncertainty continued to pressure French sovereign debt. These headwinds more than offset the support from lower oil prices, which followed US President Donald Trump’s downplaying of the risk of further strikes on Iran.
Bond markets had initially rallied last week after the Democrats’ sweep in the US midterm elections boosted expectations of political gridlock and constrained fiscal expansion. However, yields reversed on Friday after stronger-than-expected US employment data lifted the implied probability of a December Fed rate hike to 81%. By contrast, the market is pricing in a more cautious 66% probability of an ECB increase, consistent with the Eurozone’s softer growth outlook. European bond markets are also grappling with additional uncertainty over the ECB’s future policy direction, following President Christine Lagarde’s announcement that she plans to step down ahead of schedule.
