The easing observed in the European bond market over the previous two weeks has come to a halt, giving way to renewed differentiation among sovereign issuers. This development marks a significant change in recent market dynamics, as German yields continue to decline while France records a particularly pronounced increase across its entire curve. Italy also experiences an upward adjustment, although considerably smaller, while Spain remains relatively stable. The 10-year Bund yield falls by nearly 9 bp to 3.35 %, while the OAT yield rises by almost 22 bp to 5.02 %, widening their spread from 136 to more than 166 bp. The deterioration in French debt is all the more notable as it follows a period during which the general decline in yields had helped stabilize certain sovereign risk premiums. This time, the market is no longer merely distinguishing between the different rates of normalization in European yields. It is demanding a further increase in compensation for holding French debt, even as German and monetary benchmarks move lower. This development confirms that the hierarchy among sovereign issuers is becoming an increasingly decisive factor in valuations, independently of the general direction of European interest rates.
The evolution of our synthetic €STR OIS curve provides essential insight into the nature of this divergence. Following the relatively uniform easing of the previous week, the movement is now more concentrated at longer maturities. The 2-year OIS remains virtually unchanged, moving from 3.020 % to 3.013 %, while the 5-year declines by nearly 2 bp to 3.126 % and the 10-year by more than 6.5 bp to 3.261 %. The 2-year versus 10-year slope consequently narrows from 30.7 to 24.8 bp, reflecting further flattening of the monetary curve, mainly driven by the 5-year versus 10-year segment. Unlike the previous week, when the decline in OIS rates primarily reflected an adjustment in the general level of expected interest rates, the new configuration reveals greater resilience at longer horizons relative to shorter maturities. This development does not, by itself, identify the precise components driving the movement, but it shows that investors are not incorporating their monetary expectations uniformly across all maturities. Above all, it provides a benchmark for assessing more accurately the specific pressures affecting sovereign yields, particularly when these rise despite a simultaneous decline in OIS rates.
€STR and Euribor futures continue to display an upward structure in implied rates across the coming maturities. The differences between €STR contracts still reach 20.5 bp between September and December 2026, followed by 22 bp between December 2026 and March 2027 and 16.5 bp through June 2027. The pace of increase then slows markedly, becoming virtually negligible from the end of 2027 onward. Euribor futures confirm this concentration of expectations in the early maturities of 2027, followed by a much more stable profile. The market therefore continues to price in gradual monetary tightening, although these differences do not allow the precise timing or magnitude of future ECB decisions to be inferred directly. The decline in the 10-year OIS does not necessarily challenge this near-term trajectory. Rather, it highlights how the compensation required at intermediate and long horizons can evolve independently of short-term monetary policy expectations. This distinction becomes particularly important when interpreting the divergent movements in European government bonds.
Germany appears to be the main beneficiary of this new market phase. Following the flattening already observed the previous week, the Bund curve continues in the same direction, with yield declines becoming progressively larger at longer maturities. The 2-year yield falls by 5.4 bp, the 5-year by nearly 5 bp, the 10-year by 8.7 bp and the 30-year by more than 11 bp. The 2-year versus 10-year slope consequently narrows from 32.6 to 29.3 bp, while the 10-year versus 30-year slope declines from 35.7 to 33 bp. The belly of the curve remains relatively stable, with a slight increase in the 2-year versus 5-year slope offset by more pronounced flattening between 5 and 10 years. This configuration is broadly consistent with the evolution of our OIS curve, although Bund yields decline slightly more across the main maturities. At 2 years, the spread over OIS narrows from 9.4 to 4.7 bp, while at 5 years it declines from nearly 8 to less than 5 bp. At 10 years, the premium contracts more moderately, from 11.3 to 9.2 bp. The decline in German yields therefore does not exclusively reflect a compression of sovereign spreads, as a substantial part of the movement accompanies the easing in the common monetary benchmark. Nevertheless, the Bund's role as a benchmark asset, its use in hedging strategies and its importance in collateral markets may help explain its relative resilience as tensions between European sovereign issuers intensify.
France is experiencing a markedly different development, extending the weaknesses identified previously while increasing their intensity. Whereas the previous week had mainly revealed resistance to the general decline in yields at the 5-year maturity, this segment has now become the main focus of the upward movement. The 2-year OAT yield rises by 22.4 bp, the 5-year by nearly 30 bp, the 10-year by 21.6 bp and the 30-year by 13.2 bp. Yet the 2-year versus 10-year slope remains virtually unchanged, edging down from 123 to 122.2 bp. This apparent stability conceals a substantial reshaping of the intermediate segments. Between 2 and 5 years, the spread increases from 62.3 to 69.7 bp, while the 5-year versus 10-year slope narrows from 60.7 to 52.5 bp. The belly of the curve therefore accounts for a particularly significant part of the deterioration. Unlike the previous week, when the 5-year maturity had merely interrupted its normalization following a favorable correction, it now records a larger increase in yield than the other maturities. This movement confirms that the valuation difficulties affecting French debt are not confined to the very long end, but also extend to the part of the curve where funding prospects and intermediate-term interest rate expectations exert considerable influence.
Daily developments nevertheless show that this increase was not entirely continuous. The 10-year OAT yield reached 5.076 % on October 22 before retreating to 5.017 % at the weekly close, thanks to the CDC. This end-of-week easing reduces the magnitude of the movement without altering its broader significance. Unlike the previous period, when declining yields had helped contain certain French risk premiums, Friday's retreat followed an already substantial widening of relative spreads. The move above the 5 % threshold on the 10-year yield does not, in itself, constitute a change in financial market regime, but it confirms that the market is demanding significantly higher compensation for holding this maturity. The rise in the 5-year yield to nearly 4.49 % reinforces this interpretation, as the pressure is neither confined to the longest-dated bonds nor to maturities directly sensitive to monetary policy. Funding prospects, the market's capacity to absorb future issuance and uncertainty surrounding France's fiscal trajectory may all contribute to explaining this additional compensation, although yields alone do not allow their respective contributions to be measured.
Comparison with our synthetic OIS curve confirms the specific nature of the deterioration in French debt. At 2 years, the spread between the OAT yield and the monetary benchmark increases from 55.1 to 78.2 bp, while OIS remains virtually unchanged. At 5 years, the movement is even more pronounced, with the French premium rising from 105 to 136.6 bp, a widening of nearly 32 bp in a single week. This development clearly reverses the compression previously observed at this maturity. The contrast with Germany is particularly revealing, as the 5-year OAT versus Bund spread simultaneously increases from 97 to nearly 132 bp. Both benchmarks now deliver a consistent signal. The rise in French yields does not merely reflect the Bund's stronger relative performance, but a substantial increase in the compensation required relative to the common monetary factor. The resistance of the 5-year maturity, already identified the previous week, has now turned into a clear deterioration in its relative valuation.
At 10 years, the situation becomes even more significant, as the increase in the French yield occurs while the synthetic OIS declines by 6.5 bp. The OAT versus OIS spread consequently widens from 147.4 to 175.6 bp, an increase of more than 28 bp. This widening exceeds the rise in the nominal yield and shows that the general easing in monetary rates should, all else being equal, have provided support for OAT valuations. The OAT versus Bund spread also increases from 136 to 166.4 bp, confirming the consistency of the signals from both benchmarks. The structure of French premiums also retains a particularly steep profile. Between 2 and 10 years, the sovereign spread over OIS increases by approximately 97 bp, compared with 92 bp the previous week. This development deserves particular attention because the nominal OAT curve remains virtually unchanged in slope while the OIS curve flattens. The apparent stability of the French curve therefore conceals an increase in relative sovereign compensation at longer horizons. The steepness of the OAT curve continues to reflect mounting pressure despite the easing in forward monetary rates.
The situation also remains challenging at the 30-year maturity. The French yield rises by 13.2 bp to 5.487 %, while the corresponding Bund yield falls by more than 11 bp. Their spread consequently widens from nearly 156 to 180 bp, ending the relative stability observed previously. However, the French 10-year versus 30-year slope narrows by more than 8 bp, mainly because the 10-year yield rises more sharply than the 30-year yield. This development shows that the market is not simply demanding progressively higher compensation as the duration of commitments increases. Pressures are particularly pronounced at intermediate and long maturities, while the very long end shows relatively greater resilience during the correction. This distinction does not diminish the elevated level of French premiums at 30 years, but suggests that valuation constraints are increasingly concentrated in the segments most sensitive to revisions in fiscal prospects and medium-term funding requirements.
Italy is not immune to this increase in yields, but its evolution differs significantly from that of France. Following the particularly pronounced easing of the previous week, the 2-year BTP yield rises by 12.4 bp, the 5-year by 12.8 bp and the 10-year by 10.2 bp. The 30-year yield, however, increases by only 3.3 bp, allowing the long end of the curve to flatten. The 2-year versus 10-year slope narrows from 106 to 103.8 bp, while the 10-year versus 30-year slope declines from 63 to 56 bp. The correction mainly affects short and intermediate maturities, while the very long end demonstrates greater resilience. Comparison with OIS confirms that this upward movement extends beyond the common monetary factor. At 2 years, the BTP premium increases from 38.6 to 51.7 bp, while at 5 years it rises from 77.4 to 92 bp. At 10 years, the spread widens from 113.9 to 130.7 bp, an increase of nearly 17 bp, even as the monetary benchmark declines. The 10-year BTP versus Bund spread also rises from 103 to nearly 122 bp. Italy thus interrupts the compression of its sovereign premiums observed previously, but the smaller scale of its correction, particularly at longer maturities, shows that the market continues to distinguish its valuation from that of France.
The comparison between France and Italy reveals one of the week's most significant developments. The yield spread between the 2-year OAT and BTP increases from 16.5 to 26.5 bp, but the divergence becomes even more pronounced at intermediate maturities. At 5 years, the French premium rises from nearly 28 to 45 bp, widening by 17 bp in a single week. At 10 years, it increases from 33.5 to nearly 45 bp, while at 30 years it reaches 35.5 bp, compared with approximately 26 bp previously. This development extends the differentiation observed over recent weeks, but with renewed intensity. Both sovereign issuers experience an increase in their premiums relative to OIS and Bunds, without erasing the relative advantage enjoyed by Italian debt. The deterioration in French debt is particularly pronounced at 5 years, where the additional compensation required increases most rapidly. The traditional hierarchy based on debt levels is no longer sufficient to explain relative valuations. The market appears to be placing increasing importance on the credibility of fiscal trajectories, anticipated funding requirements and governments' ability to stabilize their commitments. This interpretation is consistent with the observed spreads, although it does not allow investor preferences or flows to be identified directly.
Spain presents a different configuration, confirming that tensions are not spreading uniformly across European sovereign issuers. Spanish yields remain virtually unchanged at 2 years, rise by 2 bp at 5 years and by less than 4 bp at 10 years, while the 30-year yield falls by 2.5 bp. This resilience contrasts with the Italian correction and, even more markedly, with the increase in French yields. The 2-year versus 10-year slope increases from 81 to 84.5 bp, while the 10-year versus 30-year slope declines from 55 to 48.8 bp. The movement therefore combines a slight steepening across short and intermediate maturities with flattening at the long end. The 10-year Bonos versus Bund spread nevertheless widens from 57 to more than 69 bp, mainly because German yields decline while Spanish yields move slightly higher. Relative to synthetic OIS, the picture is more nuanced. The Spanish premium at 2 years remains virtually unchanged at around 19 bp, while at 5 years it increases from 38.6 to 42.4 bp. At 10 years, it rises from 68.3 to 78.6 bp, primarily reflecting the decline in the monetary benchmark. Spain is no longer benefiting from the broad compression of sovereign premiums observed the previous week, but the widening remains smaller than in Italy and especially France. This relative resilience confirms that the market continues to value sovereign issuers according to their individual characteristics rather than applying a uniform reassessment of European government debt.
The 10-year IRS also confirms the relative deterioration of French sovereign debt. The euro swap rate stands at around 3.44 %, approximately 9 bp above the German Bund yield. Its spread against the OAT reaches −157 bp, compared with −112 bp against the BTP and −60 bp against Spanish Bonos. The widening of the French spread confirms the particularly high compensation required on French sovereign debt, also evident relative to the 10-year OIS, whose decline contrasts with the rise in the OAT yield. These spreads nevertheless incorporate liquidity, funding and collateral factors beyond credit risk alone.
Inflation swaps provide further insight into the nature of this deterioration. At 10 years, market-implied inflation expectations in France and Italy remain particularly close, at approximately 2.04 % and 2.05 % respectively, while the spread between their sovereign yields reaches nearly 45 bp. The French synthetic real yield consequently stands at 2.98 %, compared with 2.52 % for Italy and only 0.75 % for Germany. The additional compensation required on the 10-year OAT is therefore not primarily attributable to a difference in expected inflation between France and Italy. The French 10-year nominal yield rises by more than 32 bp, while its synthetic real yield increases by nearly 45 bp, with inflation expectations simultaneously declining by 12.5 bp. The recent increase in French yields thus reflects a rise in their real component and other premiums embedded in nominal yields rather than renewed pressure on expected inflation. The phenomenon is even more pronounced at 5 years, where the synthetic real yield has increased by nearly 56 bp over twenty trading sessions, compared with a 41.5 bp rise in the nominal yield. At 30 years, the situation is more nuanced, as French and Italian synthetic real yields converge toward approximately 3.07 % and 3.01 %, despite a nominal yield difference of 35.5 bp. A substantial part of this gap reflects their market-implied inflation expectations, which are higher in France at this maturity.
Our financial risk indicators confirm that the improvement observed the previous week has not continued. The European indicator rises from 1.40 to 1.66, while France's indicator increases much more sharply, from 3.35 to 4.28. Germany, by contrast, records an improvement, with its indicator falling from 1.11 to 0.64. Italy and Spain also experience a slight deterioration, but their levels remain considerably below that of France. The overall regime remains classified as RISK OFF, with no change in classification, showing that the increase in French risk is occurring in an already unfavorable environment rather than being accompanied by a broad shift in market regime. France stands out through the combination of a substantial increase in its yields, widening premiums against both Bunds and OIS, and a particularly sharp rise in its risk indicator. This consistency reinforces the signal of sovereign deterioration, while also emphasizing that a composite indicator alone cannot establish the existence of a disruption in bond market funding.
The question now being asked by part of the market is when the ECB will intervene for France. The answer is simple. When OATs begin to seriously disrupt REPO markets, to the point of threatening monetary policy transmission. The distinction between an increase in the compensation required on French government debt and a disruption in the functioning of the funding system that uses this debt as collateral is essential. Yet the latest available observations of national REPO rates do not show pressures comparable to those affecting sovereign yields. The French REPO rate stands at 2.535 %, compared with 2.505 % for Germany, a spread of just 3 bp, slightly below the 3.4 bp observed on October 15. It also remains very close to Italian and Spanish rates, at 2.540 % and 2.533 % respectively. This relative stability contrasts with the 10-year OAT–Bund spread, which had reached 171.4 bp on October 22. Our REPO stress indicator thus identifies a French sovereign risk warning, but does not confirm widespread stress in secured funding based on the available fixings. An ECB intervention would not, however, automatically result from widening spreads or a temporary disruption in REPO markets. It would require a serious threat to monetary policy transmission, an assessment that the tensions were unjustified and disorderly, and consideration of whether the conditions for deploying protective instruments had been met. For now, the market still appears able to differentiate the compensation required for French sovereign risk without visibly undermining the use of French government bonds in ordinary funding mechanisms. For how much longer?
Other monetary indicators present mixed developments. The 3-month Euribor versus €STR OIS spread increases from 10 to 13 bp, while the EURUSD cross-currency basis moves to −7.3 bp and the EURJPY basis improves from −20.2 to −16.9 bp. These movements do not reveal generalized international funding stress capable of explaining the deterioration in OAT yields. Nor do the REPO data confirm a transmission of French sovereign tensions to secured funding, which remains the main area to monitor.
The key development this week is ultimately the transition from differentiated easing across European sovereign markets to a genuine divergence in government bond yields. Germany benefits from another decline at longer maturities, Spain remains relatively stable, and Italy undergoes a correction that does not erase its more favorable valuation relative to France. France now concentrates the largest adjustments, particularly at 5 years, while its premiums at 10 and 30 years reach new highs within the data examined. Unlike the previous week, when the general decline in yields still made it possible to distinguish common monetary easing from incomplete normalization of sovereign issuers, French yields are now rising while the 2-year OIS benchmark remains virtually unchanged and the 10-year OIS declines significantly. This contrast is one of the week's most important findings. The rise in French yields can no longer be attributed primarily to the European monetary factor. It reflects an effective widening of sovereign spreads, visible across all the maturities examined and particularly pronounced at intermediate and long horizons.
A lasting stabilization of French sovereign debt would now require more than a temporary decline in yields. It would involve a simultaneous improvement in spreads against Bunds, OIS and BTPs, accompanied by greater resilience in the belly of the curve. Conversely, a further increase in French premiums without comparable tensions affecting other sovereign issuers would confirm the persistence of an unfavorable reassessment of French debt. A genuine change in regime would occur if this deterioration in bond valuations began to affect REPO funding conditions and the circulation of French collateral. At this stage, the tensions remain primarily sovereign in nature. The market is demanding increasingly substantial additional compensation for holding French government debt, but the available funding indicators do not yet provide evidence of a systemic disruption that could justify ECB intervention to protect monetary policy transmission.
As of today, Euribor and €STR futures do not price in a rate hike at this week’s meeting. This corresponds to a cumulative increase of around 25 basis points by the end of December 2026.
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It is worth recalling the episode involving Laurent Nuñez, Minister of the Interior, who explained in 2025, "I assessed the situation in good conscience and therefore considered that there was no reason to ban this gathering", while an anti-fascist and anti-racist demonstration remained banned. So much for Macron's conception of defending the Republic!
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