US Treasuries Rally as France’s Fiscal Troubles Increase Safe-Haven Demand

US Treasury bonds recovered notably on Thursday following a widespread global selloff that had pushed yields to multi-decade highs. Renewed worries about France's fiscal and political stability intensified risk premiums across Europe, prompting investors to seek refuge in safer government debt. This dynamic contributed to a sharp decline in the 10-year US Treasury yield from its 24-year peak.

The rebound in US government bonds accelerated as concerns over France's debt situation spread throughout eurozone markets, elevating risk perceptions. At the same time, yields on long-term UK gilts surged past the 6 percent threshold, a level last reached in 1998, reflecting heightened uncertainty on both sides of the Atlantic.

In the US, demand for safe assets drove the yield on two-year Treasury notes down by as much as 13 basis points to 4.75 percent. This drop represents the largest single-day decrease since August 2025, signaling a shift away from the aggressive selloff seen in recent weeks. Izaac Brook, a US rates strategist at RBC Capital Markets, pointed out that current movements are largely influenced by global developments rather than domestic economic data. He said, "Today is very much not about US fundamentals and US data. Everybody is looking at overseas yields and saying, 'You need to move into safety, buy Treasuries.'"

The global bond market has been under pressure due to several factors. Increasing oil prices stemming from tensions related to the US-Iran conflict have added to inflationary concerns. Investors have also factored in the potential for central banks worldwide to maintain or raise interest rates further in response. Additionally, governments’ heavy borrowing needs, stable economic growth, and substantial debt issuance to support emerging sectors like artificial intelligence have flooded markets with new supply, contributing to rising yields.

Thursday’s decline in short-term US yields followed a weaker-than-expected manufacturing report, indicating some easing in parts of the US economy. This data caused market participants to reduce their expectations for aggressive Federal Reserve rate hikes in the near term. Federal Reserve Vice Chair Philip Jefferson commented that policymakers may require additional time before deciding the next move, reflecting uncertainty about the pace of monetary tightening. Investors currently assign roughly a 25 percent chance to an interest rate increase this month.

In addition, swap spreads narrowed quickly, suggesting traders are unwinding crowded positions established over recent weeks amid market volatility.

European Markets Feel Strain

Across Europe, government bond spreads widened sharply. The gap between Italy’s and Germany’s two-year yields nearly doubled to 55 basis points, marking the largest daily increase since 2020. France experienced an even more pronounced move, with its two-year yield spread over Germany rising by 22 basis points, the biggest jump since 2012. Mike Riddell, head of Fidelity International’s Strategic Bond Fund, noted, "France has been slowly but steadily breaking, but today feels like the first day that broader financial markets have noticed." This development highlights growing investor concern over France’s fiscal health and its potential impact on the eurozone.

Global government bonds recorded their worst quarterly performance since 2024, according to a Bloomberg index. The turmoil pushed UK 30-year bond yields to their highest levels in over two decades, intensifying fears about sustained borrowing costs. Some analysts speculate that long-term US Treasury yields might also reach comparable heights if conditions persist.

Efforts by the US Treasury to curb the selloff by repurchasing longer-dated securities have so far failed to halt rising yields. On Thursday, the Treasury bought back $6 billion of debt maturing in 10 to 20 years, continuing a strategy aimed at supporting the bond market amid challenging conditions.

Looking Ahead

Market participants are closely watching upcoming US economic data for further direction. Friday’s payroll report is expected to show a gain of around 88,000 jobs in September, a significant slowdown from the previous month, according to a Bloomberg analyst survey. This data will be scrutinized for signs of economic momentum and will influence expectations for future Federal Reserve policy moves.

Simon White, a macro strategist at Bloomberg’s Markets Live, commented on the Treasury market, stating, "Treasuries might look cheap against stocks, GDP and the global cycle, but on their own historical terms they have more to fall before they become oversold and ready for a durable bounce." This view suggests that despite the recent recovery, Treasury yields could continue to fluctuate as investors weigh global risks and domestic economic indicators.

The recent volatility in bond markets underscores the interconnectedness of global financial systems, where developments in one region quickly affect investor sentiment everywhere. The ongoing fiscal challenges in Europe, combined with geopolitical tensions and central bank policies, will continue to influence demand for safe-haven assets like US Treasuries in the near term.