Inflation ticked higher across the U.S. in February. The consumer price index rose at an annual pace of 3.2%, up slightly from 3.1% the previous month. The strength of this reading is likely to challenge the belief that the Federal Reserve, having aggressively raised interest rates to curb inflation, could soon start lowering them.
Treasury yields rose in response to the expectation of an extended period of higher interest rates, with the U.S. 10-year yield up 22 basis points from 4.09% to 4.31%. In Europe, the 10-year Bund yield followed suit, climbing from 2.27% to 2.44%.
In this rather unfavorable environment, it’s worth noting that the yield spread between Italy and Germany is at its lowest in 30 months, hitting 123 basis points on Thursday. Italian debt benefits from bets on lower rates, but also Moody's support and relative political stability.
By comparison, the OAT-Bund spread remains stable. The French 10-year OAT yield ended 2023 slightly lower than it started (2.56% vs 2.98%). It rose to 2.88% in mid-March 2024. It is peculiar to note in this regard that, despite a French public deficit in 2023 significantly higher than expected, probably beyond 5% as hinted at by Economy Minister Bruno Lemaire, the slip-ups are not punished by the markets. The threat is always brandished when it comes to going under the yoke of rating agencies, but all the evidence shows that investors continue to feed without grumbling the inexhaustible borrower that is France in the eurozone. Yet the debt wall has its limits.