U.S. Treasury yields were mixed Monday, while French government bonds outperformed after Moody's Ratings left its credit rating on France unchanged.
Investors' focus this week will be on interest-rate decisions by the Federal Reserve and the European Central Bank on Wednesday and Thursday, respectively. Money markets price in a 90% probability of unchanged interest rates by both central banks this week, although they also expect hikes in coming months, according to LSEG data.
The two-year Treasury yield rose to around 4.712% after an auction of 2-year yields showed slightly softer demand. The Treasury sold $69 billion in 2-year notes at a high yield of 4.708%, compared with a when-issued yield of 4.705% at the time of the auction. The two-year yield closely tracks market expectations for the future path of Fed policy.
Meanwhile, the 10-year Treasury yield edged below its 5% level at around 4.984%. The 10-year Treasury yield hit a 24-year high of 5.365% on Oct. 7.
Ahead of Thursday's advance estimate of third-quarter GDP, some U.S. indicators suggested economic activity has remained robust. Texas' factory sector got even busier in October as perceptions of broader business conditions improved, according to the Federal Reserve Bank of Dallas. In addition, a reading of the Chicago Fed National Activity Index crept into positive territory in September.
Elsewhere in global markets, the German 10-year yield closed at 3.355%, up 0.012 percentage points. The France 10-year yield closed at 4.907%, down 0.121 percentage points.
On Friday, Moody's Ratings kept France's credit rating unchanged at Aa3, assuming France successfully adopts a deficit-reducing budget for 2027, while retaining a negative outlook. Many market participants had anticipated that Moody's could opt to downgrade France.
"There remain a lot of moving parts, with a risk of a downgrade further down the line, but the ratings affirmation is leading to some relief for OATs this morning," ING strategists said in a note.
Still, France remains "a major area of concern" for bond markets, said Michael Nizard, global head of asset allocation research at Edmond de Rothschild Asset Management, in a note.
In recent days, investors' concern over France's fiscal challenges and the risk that high oil prices could dent economic growth have prompted a search for safe havens, benefiting U.S. Treasurys and pushing their yields lower.
Attention now is likely to switch to the Fed's decision on Wednesday.
BondBloxx Investment Management will focus on whether the Fed leaves the door open to additional interest-rate increases. Markets currently view October as a pause following September's rate hike, not necessarily the end of the tightening cycle, said senior investment strategist JoAnne Bianco.
"Historically, central banks are reluctant to respond directly to an energy price shock because higher interest rates cannot produce more oil," she said. "The key question is whether higher energy prices stay confined to headline inflation or begin influencing broader inflation dynamics."
The outlook for the Fed's rate path is more uncertain "and will depend on the ongoing conflict in the Middle East, the strength of the U.S. economy and developments in financial conditions," said Elisabet Kopelman, U.S. economist and Fed watcher at SEB.
For now, SEB remains of the view that the Fed will raise rates once more in December, followed by renewed cuts by year-end 2027 and in the first half of 2028.
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