Treasury yield stays under 5% amid French debt turmoil

The 10-year US Treasury yield fell below 5% on Thursday, October 22, for the first time in a month. It dropped 19.3 basis points to 4.952%, its largest one-day decline since March 10, 2023, as turmoil in French government bonds and a sell-off in technology stocks sent investors toward safer assets, Dow Jones Newswires reported. The Treasury Department's daily yield curve put the 10-year rate at 4.96% that day, down from 5.13% on Wednesday. The yield had reached a multidecade high of 5.31% on October 5.wsj.com+1

Yields rose a few basis points on Friday but stayed just under 5% and were on track for a weekly decline, according to The Wall Street Journal News Corp ↘ 0.53%. The Journal said investors were looking for safety before the Federal Reserve's meeting next week.marketwatch.com+1

France's widening spread

On Thursday, France's 10-year yield hit 5.142% during the session, its highest since June 2002. Its spread over German Bunds jumped to 177 basis points, the widest since 2011, MarketWatch reported. The sell-off reflects worries that France's fractured parliament will not pass a deficit-cutting budget, especially after recent violent protests. Moody's ↘ 1.55% rates France Aa3 with a negative outlook, and its regular review was due after US markets closed Friday. Most analysts expect a cut, Reuters reported.marketwatch.com+1

"Treasuries are benefiting from France's deteriorating debt dynamics and bond market turmoil," Michael Pedroni, CEO of Highland Global Advisors and a former Treasury official, told Axios. "Safety is relative." George Catrambone, head of fixed income Americas at DWS, said the French turmoil "lends itself to a bit of a flight to safety bid," according to Dow Jones.axios.com+1

AI debt fears add pressure

Worries about the borrowing tech companies are taking on to build AI infrastructure added to the demand for bonds. CoreWeave ↘ 2.46% led the rout, CNBC reported Comcast Corporation ↘ 0.66%. "The selloff in tech stocks drove the flight-to-quality bid, compounded by continued weakness in the French sovereign market," BMO's Bank of Montreal ↘ 0.78% credit strategists wrote Friday. Treasuries rallied even as WTI crude neared $100 a barrel, CNBC noted.cnbc.com

Doubts the rally will last

Not everyone expects lower yields to stick. The Fed is widely expected to hold rates next week, and markets see about a 70% chance of a hike in December, per CNBC. ING strategists expect US yields to climb back above 5% because of persistent inflation and fiscal deficit risks, according to a summary of their note. "It is hard to see a sustained rally without the market narrative flipping to recession," Byron Anderson of Laffer Tengler Investments told CNBC.finvaulta.com+1