U.S. Treasury Yields Edge Lower, French Bond Yields Rise Ahead of Fed, ECB Meets — Update

By Emese Bartha

U.S. Treasury yields declined slightly in European trade on Tuesday, while French bond yields rose after a sharp fall Monday in the wake of Moody's decision to leave its credit rating on France unchanged.

Central bank meetings are the week's key focus for bond investors. The Federal Reserve and the European Central Bank will announce interest-rate decisions on Wednesday and Thursday, respectively. Both central banks are expected to keep their policy rates on hold, although markets price in approximately three rate hikes for both over the next 12 months, according to LSEG.

The two-year Treasury yield fell 0.7 basis point to 4.703%, while the 10-year yield declined 0.8 basis point to 4.976%, according to Tradeweb.

The 10-year German Bund yield fell 1.5 basis points to 3.343%, while the 10-year French OAT yield increased 3.9 basis points to 4.955%. Yields on Belgian OLOs and Italian BTPs edged higher. Recent selloffs in Europe focused on French bonds due to investor concerns over France's capacity to cut the budget deficit to 5% of gross domestic product, as planned, in 2027. Italy and Belgium also face significant budget and public debt challenges.

The Fed's meeting on Wednesday is the key focus for now. Markets currently assign an 89.5% probability to the Fed leaving the fed funds target rate range at 3.75%-4.00%, although a 25-basis-point hike is expected in December, according to LSEG data.

"Data since the last meeting has been in line with the narrative that the labor market looks fine and inflation remains too high for comfort," said fixed income research analyst Kish Pathak and chief economist and portfolio manager Erik Weisman at MFS Investment Management in a note. "At the same time, [Fed Chairman Kevin] Warsh's preference has been to focus on trends," they said.

The nature of risks facing the economy also argues for waiting. For example, pipeline inflationary pressures will decline if there is some resolution to the Iran war and energy prices descend, they said.

Pimco economist Tiffany Wilding expects the Fed to hold the policy rate at 3.75%-4.0% while keeping a clear tightening bias.

"The most likely next move is a 25-basis-point rate hike in December," she said.

The Fed won't release new economic projections this month. Wilding's focus at the upcoming meeting will be on how Warsh will frame the expected decision to hold rates; whether the majority of policymakers still characterize the September move as a risk-management adjustment; and how many officials dissent in favor of a hike.

"We see both the September hike and the overall rate path outlook as a recalibration, with one or two more hikes still to come that would effectively reverse last year's cuts," Wilding said.

Russell Investments expects a "hawkish hold" in October, where the Fed leaves interest rates unchanged but signals that future interest-rate hikes are likely, said global investment strategist Paul Eitelman, who expects one more hike at the end of the year.

Growth has been solid, supported by strong earnings, the AI build-out and resilient consumer spending. Meanwhile, price pressures have picked up, he said, going against Warsh's previously stated intention that underlying inflation should be moving toward the Fed's target "clearly and at sufficient speed."

Prior to the Fed decision, investors also await the Treasury's $70 billion auction of five-year notes on Tuesday.

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

(END) Dow Jones Newswires

October 27, 2026 05:45 ET (09:45 GMT)