Weekly Comment: Rising global bond yields and the French disconnection

Market overview

Broadly speaking four reasons have been put forward for the rise in global government bond yields this past year:1. the inflationary impact of the Middle East conflict and effective closure of the Strait of Hormuz; 2. ever-rising debt levels across the developed world; 3. robust economic growth, particularly in the US; and 4. large-scale bond issuance from the artificial intelligence (AI) hyperscalers.  There are other forces at work too, one of which took centre stage last week: Political risk.

For much of the year, political risk from the market’s perspective has been centred around the US, specifically second-guessing US President Trump’s next move or deciphering his latest social media post. Last week, it was the turn of France to come under the spotlight. The yield on the 10-year OAT (Obligation assimilable du Trésor) closed in on 5%, a level not seen for almost a quarter of a century.  What’s more the spread (the yield differential) between the French 10-year bond and its German bund equivalent widened to 1.5% on Friday 02 October. It hasn’t been that wide since the dark days of the European debt crisis in 2012. The widening spread reflects, in part, a flight to quality away from OATs to the relative safety offered by German Bunds—while OAT yields rose last week, the 10-year bund yield fell.

We’ve been here before

Rewind exactly 12 months ago and this is what we wrote in the 30 September 2025 edition of the Weekly Comment: “For France, political instability continues to weigh on economic confidence as budget deficit reduction plans face a delicate path to pass…Sebastien Lecornu, now faces the unenviable task of shoring up public finances. French public debt to Gross Domestic Product (GDP) has nearly doubled in the past two decades to 116% and the country is currently running a budget deficit of approximately 5% of GDP, according to IMF data.”

One year on and the above could be rolled out again with only a few minor tweaks. French public debt to GDP now stands at 119% and the budget deficit is currently running at 5.4%. Last week, Prime Minister Lecornu presented proposals to lob €54bn off next year’s budget via a mix of tax rises and spending cuts to bring the deficit down to 5%. In other words, back to where it was 12 months ago! Last year, Lecornu resigned over his draft budget only to return to office with a much watered-down version. Time will tell if there is a repeat performance.

A major fly in the ointment

Trouble is, this time round there is the not-so-small matter of a presidential election taking place next spring and it’s looking increasingly likely that voters could be faced with a choice between far-left and far-right candidates. The far-left party leadership has proposed debt held by France’s central bank ought to be cancelled, while the far-right party has Eurosceptic leanings. Easy to see why markets are demanding a higher premium for French government bonds.

Elevated political risk is not restricted to Europe’s second largest economy. Witness Spanish prime minister Pedro Sánchez calling a snap general election over the weekend. But for now, bond markets are focused on France and will likely continue to do so until there is clarity over the country’s fiscal and political path. At that point, we can start talking about a French reconnection.  

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 0.7% lower (+13.9% YTD).

United States:

The recent trend of US stocks outperforming their global peers continued. A small weekly loss of 0.2% means US large caps are up 13.8% YTD.  Weaker-than-expected economic data dampened down expectations for interest rates to be raised at the next Federal Reserve (Fed) meeting. Lower interest rates are generally deemed positive for growth stocks. No surprise then that large-cap growth (+0.7%) outperformed large-cap value (-1.0%). YTD, growth (+7.9%) is slowly but surely closing the gap on value (+20.0%). Certainly, large caps have their smaller cousins in their sights. After a 0.1% decline, small caps are up 15.3% YTD.

As for the economic data, September’s non-farm payrolls came in at 29k against expectations of 90k, while the July and August figures were revised down by a combined 60k. The unemployment rate also edged up to 4.2% from 4.1%. It was a similar story on the inflation front. The Personal Consumption Expenditures (PCE) index stood at 3.4% in August. That’s less than expectations of 3.7%. Take out energy and food prices and core PCE of 3% was better than forecasts of 3.3%. Meanwhile, the Institute for Supply Management’s Purchasing Managers’ Index (PMI) for September was unchanged on the previous month’s 54.5 (readings of 50+ indicate an expansion of economic activity).

The softish economic data was reflected in the US Treasury market with the yield on the 2-year note easing two basis points to 4.83% (up 135 basis points YTD) as chances of an October rate hike fell. The 10-year yield however tacked on nine basis points to 5.27% (up 110 basis points YTD). One set of data is not enough to allay wider inflationary and debt concerns.

United Kingdom:

UK equities underperformed. Most of the damage was done at the large end—a 2.1% weekly loss means the YTD gain now stands at 8.1%. Mid-caps fared better giving up just 0.2% over the course of the week (+10.4% YTD). An upwards revision to the UK’s economic growth for the second quarter to 0.5% from 0.4%, along with a September PMI reading of 51.9, an increase on August’s 51.7, would have gone down well with the more domestically focused smaller end of the market. Or could the outperformance be down to mid-caps taking their cue from last week’s Labour Party Conference—are they beginning to ‘Hope again’? Sterling, it seems, needs a little more persuading, ending the week unchanged at US$1.32. So too does the 10-year gilt after the yield remained at 5.37% (up 89 basis points YTD).

Europe ex UK:

The MSCI Europe ex-UK Index retreated 1.1% (+8.6% YTD) as rising government bond yields across Europe along with continued high oil prices weighed on sentiment. At the national level, German stocks finished 0.7% lower (+3.0% YTD). That compares favourably to France’s 2.1% fall (-0.3% YTD), Italy’s -2.7% (+15.8% YTD) and Switzerland’s -2.0% (+6.1% YTD).  The euro weakened to US$1.13 from US$1.14. That could be a reflection of how rising government bond yields across the eurozone, save in Germany where the 10-year bund yield fell 14 basis points to 3.46% (up 61 basis points YTD), may stay the hand of the European Central Bank (ECB) from hiking rates further (for the time being at least).

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