The French narrative is probably here to stay
Markets
The US 10-yr yield hit 5.35% for the first time since 2002 yesterday in the build-up to a closely watched $39bn 10-yr Note auction. The auction stopped 1.8 bps below the 1:00 PM bidding deadline, indicating good demand. It also showed in the 2.77 auction bid cover and in demand breakdown. Indirect bidders were awarded 80.3% of debt on offer (vs 74.7% average) with dealers only taking home 2.5% (vs 8.5% average) in a sign of broad interest. The auction results that the marginal buyer of US Treasury debt is gradually showing up at current absolute yield levels. Investor appetite will be tested again tonight when the US Treasury ends its mid-month refinancing operation with a $33bn 30-yr Bond auction. The US 10-yr yield eventually closed at 5.28% yesterday. Overnight, the US T-curve bear steepens again though as energy prices drift higher after a report in The Atlantic suggested that the White House asked the Pentagon to draw up strike options against Iran before the midterm elections. Up until now, sources always indicated that a return to military force would only come back into play after the ballot. Apart from the article, US President Trump said that he doesn’t think an Iran deal is something he’s willing to do. Brent crude currently trader at $102.5/b with the reference European gas contract (Dutch TTF) about €80/MWH for the first time since mid-September. The high since the start of the Middle East conflict stands at €84.5.
The French credit spread, these days’ other hot topic, swung back from 115 bps to 129 bps yesterday (10-yr OAT- swap). The euro is highly correlated with the French spreads with EUR/USD sliding back below the 1.12-handle. EUR/GBP set a minor new YtD low at 0.8448, testing the July low at 0.8455. The WSJ published an interview with French Finance Minister Lescure in which he said that “the reasonable thing to do considering the value in the curve would lead to have a shorter maturity”. The Finance Ministry afterwards reported that it won’t change its bond issuance strategy, trying to avoid sparking additional panic. The French narrative is probably here to stay with the 2027 budget process being the short term vulnerability and next year’s presidential elections being the medium term one. Today’s eco calendar is thin, with central bank talk in focus. We single out a speech by heavyweight Fed governor Waller on the economic outlook, Minutes from the September ECB policy meeting and a speech by BoE governor Bailey.
News and views
The Belgian Debt Agency and National Bank brought a sobering message to the federal government, which currently tries to agree on a €10 bn budgetary effort. Those discussions depart from a June fiscal update by the Monitoring Committee. Since then, however, interest rates have dramatically shot up. According to the BDA/NBB, debt interest payments will climb to €20.4 bn by 2029 as a result, €1.8 bn more than budgeted in June, Belgian newspaper De Tijd reported. In the 5-yr period stretching to 2031, additional interest rate costs amount to €8.4 bn. In the current environment, debt snowball effects may already emerge two years earlier than previously expected, by 2029. In theory, it does not compound the budgetary effort because the De Wever administration aims to comply by the European Commission’s expenditure rule, which disregards interest rate costs. But financial markets are watching as well and they care about the big picture. Premier De Wever aims to reach a deal by October 13, when his State of the Union is due.
The NY Fed’s September consumer inflation survey found that inflation expectations picked up at short- and medium-term horizons. The one-year gauge increased by 0.3 ppts to 3.9%, the highest since May 2023. The three- year indicator added 0.1 ppt to 3.3%, virtually matching June’s four-year high. The 5-yr measure was unchanged at 3%. Labour market views mostly improved, the survey showed. The mean probability of a higher US unemployment one year from now fell 0.5 ppts to 43.9%, still above the 12-month trailing average of 42.4% though. The perceived probability of losing one’s job in the next 12 months fell by 0.3 ppt to 13.5%. That’s the lowest since December 2024. US households anticipate income to increase by 3.1% and nominal spending to rise 5.5% (+0.3 ppt) in the year ahead. A larger share of them reported a worse (expected) financial situation, both compared to a year ago as well as in one year’s time.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
