Treasury market swept up in global jitters tied to resignation of French prime minister after less than a month

The resignation of French Prime Minister Sébastien Lecornu after less than a month in office triggered a selloff in European government bonds, spilling over into the U.S. Treasury market. This political instability, compounded by concerns over the ongoing U.S. government shutdown, drove U.S. 10-year and 30-year yields up by nearly 4 basis points to 4.16% and 4.75% respectively, reflecting increased risk perception and steepening yield curves for longer-dated debt across both regions.

Analysis

Market Extra Treasury market swept up in global jitters tied to resignation of French prime minister after less than a month Referenced Symbols U.S. government bond yields followed their counterparts in Europe higher on Monday in reaction to the resignation of French Prime Minister Sébastien Lecornu, who had been in the job for less than a month. Traders and investors were rattled by Lecornu’s decision to step down because it raised the prospect that France’s leaders won’t be able to adopt a budget. Lecornu said during a televised address that he was ready to compromise and the country’s political parties were not. The developments in France spilled over into the U.S. bond market during the overnight session, triggering a modest selloff that sent yields on 1-month Treasury bills through the 30-year bond slightly higher into the New York morning. With the U.S. government’s partial shutdown entering its sixth day, there were growing worries in some corners of the bond market that it could last longer than previously expected.“The worries are that the U.S. shutdown could go on for another week or so, and some people are thinking it could last until the 15th of October,” said Tom di Galoma, a managing director at Mischler Financial Group, which has its East Coast headquarters in Stamford, Conn. “With the French prime minister resigning after being there for less than a month, that has sort of compounded the move in U.S. Treasurys to higher yields overnight.” As of Monday morning in New York, the rise in U.S. yields was being led by rates on the longest-dated securities, followed by those on the shortest-dated government maturities. Yields on 10- and 30-year government debt rose almost 4 basis points each to 4.16% and 4.75%, respectively. The rate on the 1-month T-bill was up by about the same magnitude at 4.12%, according to FactSet. U.S. stocks moved mostly higher.Meanwhile, yields were also rising in France, Germany, the U.K., Italy, Spain, the Netherlands, Portugal, Greece and Switzerland. At one point, the French 10-year yield was higher by as much as 8.5 basis points, di Galoma said via phone.“Yield curves are steepening, which means market participants think there’s a lot of risk in the longer-dated bonds of countries like France, Germany and the U.S.,” he added. About the Author A surge in global bond yields has been triggered by political instability in France, following the resignation of Prime Minister Sébastien Lecornu after less than a month in office. This event, which raises doubts about the country's ability to pass a budget, prompted a sell-off in European sovereign debt, with the French 10-year yield climbing by as much as 8.5 basis points. The jitters have spilled over into U.S. markets, compounding existing concerns over the ongoing partial U.S. government shutdown. Consequently, the U.S. Treasury curve has seen yields rise, with the 10-year and 30-year rates increasing by nearly 4 basis points each to 4.16% and 4.75%, respectively. This market reaction is causing a steepening of yield curves, which indicates that investors perceive significantly more risk in longer-dated government bonds for major economies, including the U.S., France, and Germany.

Key Decisions for Investors

• Investors holding long-duration sovereign debt, such as 10- and 30-year Treasurys, should re-evaluate their positions as the steepening yield curve signals rising risk premiums and potential for further price declines.
• Given that the sell-off is driven by unpredictable political events in both Europe and the U.S., it may be prudent to hedge long-duration exposure or tactically reduce portfolio duration to mitigate the impact of continued yield increases.
• Monitor developments related to the French government's stability and the ongoing U.S. government shutdown, as these are the primary catalysts that will dictate near-term volatility and direction in the global bond market.