Government Bond Yields Fall as Risk Sentiment Tentatively Improves

By Emese Bartha

Global government bond yields fell Monday as oil prices moved lower, helped by tentatively improving risk sentiment over both central banks' commitments to bring inflation back to target and growing oil flow through the Strait of Hormuz.

An interest-rate hike by the Federal Reserve last week and signals of another rise this year reassured markets about the Fed's inflation-fighting resolve. Interest-rate hikes by the Bank of Japan last week and the European Central Bank the week before added to markets' conviction.

Risk sentiment has improved as oil prices fall on hopes that Saudi Arabia will partially restore a crucial pipeline and ahead of a summit between President Trump and his Chinese counterpart Xi Jinping in Washington later this week.

"For now, markets appear willing to look through the geopolitical noise and instead price two more supportive developments," said Patrick Munnelly, market strategist at Tickmill Group, in a note. These are "progress in U.S.-China talks ahead of this week's Trump-Xi meeting, and signs that oil and gas shipments through the Strait of Hormuz are improving under U.S. naval protection," he said.

The 10-year U.S. Treasury yield fell 3.3 basis points to 4.962%, having hit 5.041%, the highest since 2007, last week, according to Tradeweb.

The 10-year German Bund yield fell 6 basis points to 3.471%, having hit 3.572% last week, its highest since 2009. The 10-year French OAT yield slid 11.4 basis points to 4.466% despite budget deficit concerns. The 10-year U.K. gilt yield fell 7.5 basis points to 5.234%.

Late last week the 10-year OAT-Bund yield spread broke above 100 basis points, "on the back of fiscal uncertainty as the French government is missing the budget target for 2026," Mohamad Al-Saraf, senior fixed-income and forex analyst at Danske Bank, said in a note.

France's budget deficit was expected at 5% of gross domestic product in 2026 but the government has said it would be closer to 5.4%.

"The government expects to cut the budget deficit to 5% in 2027 by reducing spending, but it will be difficult for the minority government to get the needed majority," Al-Saraf said.

In addition, on Friday, Scope Ratings downgraded France to A+ from AA-, revising the outlook to stable from negative, while DBRS lowered France's outlook to negative from stable, confirming its rating at AA.

The 10-year OAT-Bund yield spread narrowed 5.5 basis points on Monday to 99.4 basis points, according to Tradeweb.

Meanwhile, investors keep their focus on the prospect of further rate hikes by central banks.

"While global central banks are tightening policy, the goal is largely to address inflation and currency pressures rather than deliberately slow economic growth," Seema Shah, chief global strategist at Principal Asset Management, said in a note. "As such, this is likely to be a relatively shallow hiking cycle," she said.

Principal Asset Management's base case is for one further Fed hike in December before moving to the sidelines, although additional tightening next year remains possible if inflation continues to prove sticky. "Market expectations are somewhat more hawkish, but even they anticipate only one or two additional Fed hikes in 2027. Elsewhere, only gradual and limited additional tightening is expected from the ECB and BOJ," she said.

Write to Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

September 21, 2026 04:43 ET (08:43 GMT)