French bond selloff deepens as US yields hold above 5%

The benchmark US 10-year Treasury yield stayed above 5% on Monday, October 19. It edged higher as AI stocks recovered from a sharp drop the week before, according to Reuters. On the other side of the world, the debate was about how high long-term rates could climb. In Europe, French government bonds fell again after a weekend of riots.afr.com

The 10-year yield has come down from the 24-year high of 5.364% it hit on October 7. Last week it fell 14.6 basis points, its biggest weekly drop in seven months. Inflation readings came in hotter than expected, but investors bought Treasuries as a safe place to wait out a selloff in AI stocks. On Monday the S&P 500 ↗ 0.34% and the Nasdaq Composite rose as AI shares rebounded.africa.businessinsider.com+2

Pressure on stocks

High real yields, meaning returns after inflation, are making expensive stocks harder to justify. The 10-year real yield was 2.74% on October 16. In a Bank of America survey, fund managers said the 10-year yield would have to reach 5.9% before they would move meaningfully from stocks into bonds. Futures markets put the chance of a Federal Reserve rate hike at next week's meeting at 17.2%.finance.yahoo.com+2

"Concerns that the AI buildout could weigh on economic growth have prompted something of a 'flight-to-safety' move," said Cooper Howard of Schwab. He added that "rate volatility is likely to continue".schwab.com

Sydney debates the ceiling

At Commonwealth Bank's annual global markets conference in Sydney, traders, debt issuers and investors kept coming back to one question: how high can long-term bond rates go? The AFR's headline asked whether 10-year rates could reach 7%, and answered that history says they can.afr.com

Christopher Kent, an assistant governor at the Reserve Bank of Australia, told the conference there was "reasonable evidence" that neutral interest rates are rising. Neutral is the rate that neither speeds up nor slows down the economy. He also said the term premium, the extra yield investors want for holding long-term debt, has climbed to a 12-year high.rba.gov.au+1

France takes the hardest hit

French 10-year yields rose 13 basis points to 4.9% on Monday, closing in on the 4.99% reached in early October, which was the highest since 2002. The CAC 40 fell 1.5%, and shares of BNP Paribas and Societe Generale Société Générale S.A. each dropped 3%. The extra yield investors demand to hold French rather than German debt rose to 146 basis points, its highest in two weeks. Moody's ↘ 1.23% is set to review France's credit rating on Friday, October 23.reuters.com

"French OATs continue to be the punching bag in the ongoing selloff in sovereign bond markets," Capital Economics economist Elias Hilmer wrote. OATs are French government bonds. Mike Bell of RBC BlueBay Asset Management summed up the situation more bluntly: "It looks like either the bond markets riot, or the people riot, or both".africa.businessinsider.com+1