Wild OATs Spread Autumn Discontent

Bond markets are likely to remain divided between attractive short maturities and vulnerable long-dated sovereign debt, with France representing the clearest source of European risk.

• U.S. Treasury yields continued to bear-steepen, with long-end yields reaching 25-year highs as persistent corporate and government issuance keeps the term premium elevated.
• The soft jobs report and weak consumer confidence point to a K-shaped U.S. economy; CCC spreads are at their widest in four years, while CLO demand has kept B-rated spreads near their 2026 average.
• French sovereign spreads have risen to more than three times their 12-year average as hedge funds unwind carry positions, and the two-year spread jumped from 25bp to 85bp in a few days.
• France is expected to confirm a 2026 budget deficit of 5.4%, while only 12% of OATs are held by domestic households, leaving the market exposed if foreign and risk-averse domestic investors continue selling.
• Brazil's first-round election result strengthened local assets, lowering yields by 150bp and lifting the real by almost 5%; the author expects further gains if Flavio Bolsonaro wins the runoff.
• The author sees more value in short-dated U.S. and euro yields, Italian sovereign credit, and the debt of lower-leveraged EU economies such as Bulgaria and Croatia than in long maturities or French OATs.

Takeaway: Investors should favour shorter-duration opportunities and robust sovereign balance sheets, remain cautious on France and long-dated U.S. bonds, and watch whether higher yields create a broader tightening in financial conditions.