U.S. Treasury Yields Edge Lower, French Bond Yields Rise Ahead of Fed, ECB Meets — Update

What happened

U.S. Treasury yields fell slightly in European trade, while French bond yields rose after Monday's sharp drop following Moody's decision to leave France's credit rating unchanged. The Federal Reserve and European Central Bank will announce rate decisions on Wednesday and Thursday.

Confirmed

Global impact / market context

Higher French yields raise the cost for France to borrow money, which means more budget spending goes to interest and less to other needs. Investors are focused on whether the Fed and ECB signal future rate moves.

Analyst inference

Markets expect both central banks to hold rates steady, yet price in about three rate hikes over the next 12 months. French bonds remain pressured by concerns over cutting the budget deficit to 5% of gross domestic product by 2027.

Analyst inference

What to watch

1. The Fed's Wednesday meeting is the key focus; markets assign an 89.5% probability to keeping the fed funds target range at 3.75%-4.00%. Confirmed
2. Watch whether the Fed and ECB keep policy rates on hold as expected, and whether their comments support the roughly three rate hikes markets price in over 12 months. Proposed
3. Watch French bond yields for further pressure if investors doubt France can cut its budget deficit to 5% of gross domestic product by 2027, which could raise its borrowing costs. Analyst inference

Evidence

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