French 10-year yield set for biggest quarterly jump since 1987

​France's 10-year bond yield was set to post its biggest quarterly jump in nearly four decades and its biggest monthly rise in almost four years, underscoring the scale of September's global bond selloff. While yields across the euro zone edged back from this week's peaks on Wednesday as ‌markets turned more cautious on central bank rate hikes, the move was contained by hotter-than-expected inflation data from France, Germany and Italy.

Bond yields have surged this month as prices tumbled, with soaring energy costs fanning inflation fears and the artificial intelligence boom lifting economic growth, leaving investors to position for a period where interest rates stay higher for longer. On top of these global factors, France has a high deficit, and ‌political manoeuvring ahead of next year's presidential election could make it hard to reduce this.

The yield on the 10-year OAT was last 4.78%, down 3 basis points on the day ‌and just shy of Tuesday's 18-year high. . The French benchmark yield is up 61 bps in September, its biggest monthly increase since late 2022 and underperforming equivalent bonds of the other major euro zone nations.

The yield has also risen 113 bps since the start of July, its biggest quarterly jump since 1987. This is starting to weigh on French fiscal space. The government said late on Tuesday it would sell a record €340 billion of bonds to investors next year, ⁠with interest expenditure now ​expected to be €5 billion higher in 2026 ⁠and €7 billion higher in 2027 compared to forecasts from a year ago.

"Higher interest rates are therefore becoming a source of fiscal deterioration, making it even more difficult to stabilise public debt," said Charlotte de Montpellier, a senior economist at ING. The ⁠spread between French and German 10-year borrowing costs was last 120 bps, its highest since 2012.

"An improvement in the situation in the Middle East and a decline in energy prices could bring European interest rates down. ​But in the absence of a political or fiscal improvement in France, the potential for a meaningful tightening of the spread appears limited," de Montpellier said. INFLATION TEMPERS OPTIMISM

Germany's 10-year ⁠yield, the euro zone benchmark, was down 3 basis points at 3.58%, edging away from the 3.65% that it hit on Monday, its highest since 2009. It has risen 26 bps in September.

Stalling oil prices, albeit at elevated levels, as ⁠well ​as central bankers pushing back against market bets on rapid and sustained central bank rate increases have calmed markets. Some quarter-end rebalancing was also possibly in the mix, analysts said.

In the United States on Tuesday, Federal Reserve Bank of New York President John Williams said he thought the central bank has time to weigh economic data before deciding when to raise interest rates again, causing ⁠traders to walk back bets on an October rate hike. Meanwhile, European Central Bank policymaker Peter Kazimir said the ECB, which has raised rates twice this year, had time to be flexible, making ⁠a broadly similar point to ECB chief Christine Lagarde ⁠on Monday.

European 2-year yields, which are more sensitive to ECB policy, fell more than 10-year yields. Germany's 2-year yield dropped nearly 4 bps to 3.23%. But European inflation data showed that pressure on the ECB could be continuing to build.

Inflation rose sharply in five German states in September, while ‌France's harmonised inflation rate was ‌3.4%, up from 2.6% in August, and in Italy's jumped to 4.1% from August's 3.2%.