French Budget Bill Triggers European Bond Market Turmoil

The French Republic presented its 2027 budget bill on Thursday with the goal of reducing the national deficit to 5% of GDP. The announcement triggered immediate turmoil in European bond markets, pushing the spread between French and German 10-year yields to a post-euro crisis high.

This instability spilled over into broader financial markets, causing a decline in the 2-year EUR swap. Consequently, the probability of an October rate hike by the European Central Bank dropped to 20%. While Euro area September headline inflation rose to 3.8%, markets anticipate the central bank will avoid hiking rates to prevent further bond market turbulence.

Market anxiety combined with soft economic data from the United States, including August PCE and JOLTS job openings, also impacted global expectations. The probability of an October rate hike by the Federal Reserve System fell to below 30%.