Eurozone government bonds ended the month with a sharp divergence: German Bund yields fell about 20 basis points, while French paper continued to rise for the fifth month in a row.
On Friday, eurozone government bonds ended the month with a sharp divergence. Investor flight to German safe assets gave Bunds the strongest monthly rally in several months, while France's borrowing costs rose for the fifth month in a row — for the first time since 2022.
The yield on 10-year German bonds fell about 20 basis points, which may be the largest monthly drop since February. Shorter maturities joined the decline: the yield on two-year Bunds also fell about 20 basis points — the sharpest monthly decline since April last year.
At the other end of the spectrum, French bonds were set to close in positive territory for the fifth month in a row. This is the longest streak of monthly gains in four years and a reflection of the prolonged political deadlock, street protests and focus on budget policy in Paris.
The selloff in technology stocks accelerated the inflow of capital into liquid government assets. Weak financial results and a sharp rise in capital spending by US tech giants heightened concerns about debt burdens and weakening demand. ECB President Christine Lagarde earlier warned that long-term borrowing costs worldwide are coming under upward pressure partly because of large technology companies issuing long-term debt.
The Bund rally was also supported by a reassessment of the resilience of economic growth in Europe and geopolitical tensions in the Middle East.
The spread between 10-year French OATs and German Bunds earlier in October widened to more than 175 basis points — levels not seen since the eurozone debt crisis of the early 2010s. Yields on French 10-year bonds briefly exceeded 5.14% and reached a high since 2002.
Pressure was intensified by mass protests against the rising cost of living and parliament's rejection of key provisions of the 2027 budget proposed by Prime Minister Sébastien Lecornu. The ECB kept the deposit rate at 2.50%, which markets viewed as a 'hawkish pause'. Money markets put the probability of a rate hike in December at roughly two out of three cases. Lagarde also said she would leave the post of ECB head in February 2027 — nine months earlier than planned.