Key Takeaways
- German 10-year and 2-year bond yields remained stable on Thursday.
- French bonds could face scrutiny with a €13 billion debt issuance expected later in the day.
- Lower oil prices due to potential Iran-Oman deal limit inflation risks.
Euro zone government bonds opened steady on Thursday, following German benchmark yields hitting three-week lows the previous day. This stability came despite ongoing concerns over French bond markets, which have been under pressure in recent weeks.
German 10-year and 2-year bond yields traded at 3.11% and 2.72%, respectively, with minimal changes from Wednesday’s close. Analysts noted that while oil prices had fallen below $80 a barrel due to a proposed Iran-Oman deal aimed at ending the war in the Gulf, this could still limit further rallies in bond prices.
French government bonds, which have been the poorest performers among G7 debt markets over the last month, are set for close scrutiny. Nearly €13 billion in new debt is expected to hit the market later on Thursday, split between 10-year nominal bonds and longer green bonds.
Commerzbank strategist Rainer Guntermann commented that 'OAT spreads widened versus (European government bond) peers of late, suggesting that supply concessions could have played a role.' He added that once this supply is out of the way, French bonds may recover. However, unease over European governments' long-term financing and volatile domestic politics has undermined French bonds recently.
In the last month, yields on 2- and 10-year French OATs rose far more quickly than those elsewhere. At 2.908% on Thursday, 2-year OATs are yielding nearly 19 bps more than a month ago, compared with top-performing 2-year US Treasuries, which have risen by just 7.1 bps.
Benchmark 10-year yields are nearly 18 bps higher than a month ago, compared with only 9 bps for UK gilts, the best-performing bonds in the last month. The previous 10-year OAT auction in July achieved an average yield of 3.73% for the November 2036 issue and a yield of 3.68% for May 2036 paper.
Spanish government bonds also come to market with some €5 billion spread across 5- and 10-year debt, adding further liquidity to the European bond markets but not as much pressure on French yields.
'OAT spreads widened versus (European government bond) peers of late, suggesting that supply concessions could have played a role.'
Rainer Guntermann, Commerzbank strategist
