US Treasury Secretary Bessent publicly addressed the turmoil in the French bond market for the first time, emphasizing on one hand that he expects no spillover, while on the other confirming that capital is flowing out of risk-exposed countries like France into US Treasuries as a safe haven. This statement, for the first time at the official US level, directly linked French sovereign credit risk to the decline in US Treasury yields.
On Tuesday the 20th, during an interactive livestream on the video media platform 2Way, Bessent said, "I expect what is happening in France will not produce spillover," and commented that France indeed faces severe challenges, while French President Macron's economic team is "first-rate," and he is very familiar with that team.
But Bessent also acknowledged signs of safe-haven activity, saying: "We are indeed observing that funds are flowing out of some concerning countries and rushing into US Treasuries for safety, which we did not anticipate."
Media outlets also noted that the bond market has shown the safe-haven signals mentioned by Bessent. For example, the yield on the benchmark 10-year US Treasury has fallen about 20 basis points from its early October high, and also in October, the spread between French and German 10-year government bonds once approached 160 basis points.
Therefore, this round of US Treasury price increases cannot be explained solely by US domestic inflation or the outlook for the Federal Reserve's policy path; global safe-haven demand is also an important driver. This is because the turmoil in the French bond market is indirectly affecting US Treasury pricing through the channel of capital reallocation.
French bond market pressure continues to build
The recent turmoil in the French bond market is not an isolated event but a continuation of months of sustained repricing of sovereign credit risk. The yield on French 10-year government bonds previously rose to 4.963%, the highest since 2002; the French-German 10-year spread widened to as much as 159 basis points within October. More strikingly, France's borrowing costs once exceeded Italy's — even though France's credit rating is three to five notches higher than Italy's and its GDP is 40% larger.
Market pricing of French sovereign credit has undergone a structural change. The yield on covered bonds issued by French banks was once nearly 30 basis points lower than that of 10-year French government bonds, creating an inversion between sovereign debt and covered bond yields.
This inversion means that investors believe the risk of holding French government debt is now higher than the risk of holding French bank mortgage assets.
Recently, protests in France have escalated, with the level of violence over the weekend exceeding government expectations, further intensifying market concerns about the government's ability to control its budget deficit. Japanese investors have net sold approximately 356 billion yen of French government bonds so far this year, and the euro has weakened to around $1.1161, both reflecting a shift in international capital attitudes toward French assets.
US Treasuries become safe-haven destination, French spillover risk still to be observed
Bessent's remarks placed the decline in US Treasury yields within the framework of global capital flows. When political and fiscal uncertainty rises in France and other eurozone countries, US Treasuries, as the world's most liquid safe-haven asset, become the preferred destination for capital reallocation.
France's political deadlock has weakened investor confidence in eurozone risk assets, with some funds withdrawing from European sovereign debt markets and shifting to increase holdings of US Treasuries. The roughly 20 basis point decline in US Treasury yields from their early October high occurred precisely against this backdrop.
Although Bessent explicitly stated he does not expect spillover, France, as the eurozone's second-largest economy, still cannot be ignored in terms of the potential transmission of its bond market turmoil to regional risk premiums. Italy's 10-year government bond yield simultaneously rose 11 basis points to 4.58%, indicating that the market is already reassessing the credit risk of eurozone peripheral countries.
Bessent's recognition of the capabilities of France's economic team is more of a diplomatic reassurance; what the market truly cares about is whether the French government can produce a credible fiscal consolidation plan amid the political deadlock. Until then, volatility in French government bonds will remain an important variable in global fixed-income markets.
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