Global bond markets began the week with a modest reprieve after a sharp selloff, but elevated U.S. Treasury yields and growing concerns over France’s public finances kept investors focused on the risks of higher-for-longer interest rates, government debt and renewed pressure on major currencies.
U.S. Treasury yields edged lower Monday as investors awaited minutes from the Federal Reserve’s latest meeting for clues about the central bank’s next policy moves. The benchmark 10-year Treasury yield fell more than one basis point to 5.255%, while the 30-year yield declined one basis point to 5.614%. The two-year Treasury yield was two basis points lower at 4.797%.
One basis point is equal to 0.01 percentage point, while bond prices and yields move in opposite directions.
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The retreat followed several weeks of selling across bond markets, with investors demanding higher yields amid concerns over inflation, government borrowing and the outlook for monetary policy. A weaker-than-expected U.S. jobs report on Friday helped ease some pressure by reducing expectations of another immediate Federal Reserve rate increase.
Markets were pricing an almost 82% probability that the Fed would leave interest rates unchanged at its next meeting, according to the CME Group’s FedWatch Tool.
That has shifted the focus toward the Fed’s communication. The Institute for Supply Management’s services activity report was due Monday, while minutes from the central bank’s September meeting are scheduled for Wednesday.
“The highly unsettled bond market makes the incoming US data and Fed communication particularly relevant,” Deutsche Bank analysts said in a note. “So the minutes will be worth watching for how the broader Committee is framing the current tightening cycle and for its discussion of the neutral rate, where estimates shifted higher in the September SEP.”
Analysts consider the minutes essential because markets are attempting to reconcile weaker employment data with a Federal Reserve that has signaled a more restrictive policy path. Traders now see only an 18% probability of a rate increase in October, but still assign a 69% probability to a December hike.
That divergence leaves investors facing a difficult rates environment. The immediate pressure for another hike has diminished, but expectations of further tightening later in the year remain firmly embedded in markets.
Debt Concerns Strengthen Gold and Pressure The Euro
The uncertainty around rates and government borrowing has also supported gold, which rose 0.6% to $4,165.49 an ounce by 0901 GMT. U.S. gold futures for December delivery gained 0.8% to $4,194.60.
Gold has traditionally served as a hedge against inflation and financial uncertainty, although higher interest rates increase the opportunity cost of holding a non-yielding asset. A stronger dollar also tends to make gold more expensive for investors using other currencies.
UBS analyst Giovanni Staunovo said rising government debt remains a structural source of support for bullion.
“We continue to view rising government debt levels as a structural tailwind for the yellow metal,” Staunovo said, noting that gold has held up relatively well despite pressure from higher interest rates and a stronger U.S. dollar.
The concern is especially acute in the United States, where total government debt topped $40 trillion last month, prompting renewed warnings about the sustainability of the country’s fiscal trajectory.
Oil prices, meanwhile, fell Monday as increased Middle East crude exports and the release of oil stocks by the Group of Seven boosted available supply and eased some inflation concerns. That could provide modest relief to central banks, although the broader pressure from government borrowing and elevated yields remains.
The same combination of fiscal concerns and higher rates is creating an even more pronounced problem in Europe. The euro fell to a 17-month low against the dollar as investors reacted to France’s deteriorating fiscal outlook and the sharp bond-market selloff of the previous week. The currency fell as low as $1.1161 in Asian trading, its weakest level since May 2025, before trading 0.62% lower at $1.1118.
French government bonds have come under pressure as expectations for higher policy rates collide with political uncertainty ahead of the 2027 presidential election. Investors are more questioning how easily France can restore its public finances at a time when political divisions are complicating efforts to reach agreement on spending reductions.
The spread between French government bonds and benchmark German Bunds, an important measure of the risk premium investors demand to hold French debt, widened to about 150 basis points on Friday. That was the highest level since the euro-zone sovereign debt crisis in 2011. The spread subsequently narrowed to around 140 basis points and was last 5 basis points wider at 145.50.
“Latest bond market dynamics are increasingly concerning and somewhat reminiscent of a sovereign debt crisis. Friday’s acceleration of the sell-off in OAT spreads and flight-to-quality patterns in Bunds are a case in point,” Hauke Siemssen, strategist at Commerzbank, said.
“The (French) spread sell-off seems to increasingly feed on itself, creating a dangerous market backdrop,” he said, while adding that there was a fundamental justification for wider OAT spreads.
France’s fiscal difficulties are being amplified by its political constraints. Analysts say an upcoming presidential election and a hung parliament, where compromise has frequently proved difficult, make it harder for the government to implement the measures needed to bring its finances under control.
Planned budget cuts have also intensified pressure on the education sector and contributed to protests across the country, adding another political obstacle to fiscal consolidation.
The market reaction goes beyond France. If investors begin demanding higher compensation for holding French debt, concerns can spread to other highly indebted European sovereigns, particularly if the European Central Bank is simultaneously constrained by inflation and unable to provide easier financial conditions.
Dollar Regains Ground As Yen Finds Support
The euro’s decline has reinforced the dollar’s position at a time when investors are already reassessing expectations for U.S. monetary policy.
The dollar index rose 0.39% to 102.33 after reaching 102.53, its highest level since April 10, 2025. That left the index close to levels reached around what President Donald Trump called “Liberation Day,” when his administration announced a sweeping tariff package in April 2025 that triggered a broad selloff in U.S. assets.
The dollar index had been around 104 before that announcement.
The Fed’s September rate increase had already reduced some of the euro’s appeal as an alternative to the dollar, analysts said. The widening gap between French and German bond yields has added another source of pressure, weakening confidence in the euro at a time when political and fiscal risks are becoming more difficult to separate.
Markets are now pricing a 78% chance of the Federal Reserve holding rates steady in October, compared with 36% a week earlier. Investors continue to expect a December increase, followed by two more hikes in the first half of 2027.
The Japanese yen presented a different picture. It rose 0.10% to 157.67 per dollar, supported by warnings from Japanese authorities over excessive currency depreciation and its traditional safe-haven appeal.
Concerns over Japan’s fiscal outlook have also eased somewhat after Prime Minister Sanae Takaichi reiterated her commitment to fiscal sustainability, helping reassure investors who had been worried about rising bond yields and deteriorating public finances.
At the same time, data released Friday showed that annual core inflation in Tokyo accelerated in September at its fastest pace in 10 months. The stronger inflation reading could strengthen the case for further Bank of Japan rate increases.
Taken together, the moves across Treasuries, French bonds, the dollar, euro and yen show how closely fiscal policy and monetary policy are now interacting across major markets.
The immediate retreat in U.S. Treasury yields may offer some relief after the recent selloff, but investors remain confronted by a more difficult question: how much higher can borrowing costs remain when governments are carrying record debt and central banks are still unwilling to declare the inflation battle over?