Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 06/10/26
Sovereign bond spreads over Bunds remain elevated, with political developments in Europe gaining attention
The “G7” announced on October 2nd the collective release within the next 4 months of a combined amount of up to 100 million barrels of crude oil and diesel, from their strategic reserves.
That process will start with a release within 20 days of a “substantial” amount of diesel. The G7 members reiterated their commitment to refrain from any respective export restrictions among them. Reference diesel prices eased, albeit remain c. +80% above their pre-war levels.
In Spain, on October 5th PM Sanchez (PSOE) called snap general elections for November 29th, after legislation regarding housing failed to gain approval from the legislature. Mr. Sanchez leads a coalition government with a tight majority in the legislature (179 out of 350 seats). Current opinion polls point to a right-of-center coalition led by the People's Party (PP) as the most likely outcome.
US Treasury – Βund rate differentials widened significantly both in the short and the long end (+20 bps wow to 178 bps for the 2s and +26 bps to 182 bps for the 10s) as market expectations vis-a-vis the extent of interest rate hikes by the ECB were scaled back due to concerns surrounding France’s fiscal outlook.
As a result, the euro depreciated by -1.1% in the past week against the US Dollar, its weakest level since May 2025, while initially came under renewed pressure on Monday October 5th following the political developments in Spain (-0.3% to €/$1.122).
In France, the ongoing minority coalition government presented on October 1st its initial proposal for the 2027 Budget. The draft proposal aims at a general government overall deficit as percent of GDP of -5.0% in 2027. Note that the same goal had been set for 2026 with the respective Budget, albeit the outcome is expected to be close to -5.4% of GDP (-5.1% in 2025) due to the energy crisis.
Under a no-policy-change scenario, the deficit is expected to reach -6.5% in 2027. Importantly, even the proposed fiscal adjustment is not sufficient to stabilize the public debt as % of GDP, which stood at 118% in Q1:2026 and projected to rise further to 122% by 2027 according to the Budget.
The debate of the draft in the legislature is set to start on October 13th, to last 2 months. Considering the high fragmentation of the current legislature, approval of the 2027 Budget appears challenging.
Rather, as was also the case for 2026, an invocation of Article 49.3 of the French Constitution is likely, under which a bill is automatically adopted unless lawmakers succeed in a vote of no confidence to the government. In any case, political uncertainty in France is expected to be elevated in the next months. French sovereign bond yield spread over Bund widened sharply by +30 basis points (“bps”) wow to 140 bps at the 10-year tenor, the highest since May 2012, with intra-session volatility significantly elevated.
US Treasury long-term yields rose by +10 bps wow and further by +3 bps on October 5th to 5.31% at the 10-year tenor, the highest since April 2002. Its 2-year peer fell by -4 bps wow and was little changed on October 5th to 4.82%, as investors’ expectations eased for an imminent additional hike in the Federal Funds Rate (FFR) at the next meeting of the Federal Reserve on October 28th (probability of 22%) following weaker-than-expected headline non-farm payroll (NFP) data. Indeed, NFPs increased by +29k on net in September, below consensus estimates for +89k.
The “G7” announced on October 2nd the collective release within the next 4 months of a combined amount of up to 100 million barrels of crude oil and diesel, from their strategic reserves.
That process will start with a release within 20 days of a “substantial” amount of diesel. The G7 members reiterated their commitment to refrain from any respective export restrictions among them. Reference diesel prices eased, albeit remain c. +80% above their pre-war levels.
In Spain, on October 5th PM Sanchez (PSOE) called snap general elections for November 29th, after legislation regarding housing failed to gain approval from the legislature. Mr. Sanchez leads a coalition government with a tight majority in the legislature (179 out of 350 seats). Current opinion polls point to a right-of-center coalition led by the People's Party (PP) as the most likely outcome.
US Treasury – Βund rate differentials widened significantly both in the short and the long end (+20 bps wow to 178 bps for the 2s and +26 bps to 182 bps for the 10s) as market expectations vis-a-vis the extent of interest rate hikes by the ECB were scaled back due to concerns surrounding France’s fiscal outlook.
As a result, the euro depreciated by -1.1% in the past week against the US Dollar, its weakest level since May 2025, while initially came under renewed pressure on Monday October 5th following the political developments in Spain (-0.3% to €/$1.122).
In France, the ongoing minority coalition government presented on October 1st its initial proposal for the 2027 Budget. The draft proposal aims at a general government overall deficit as percent of GDP of -5.0% in 2027. Note that the same goal had been set for 2026 with the respective Budget, albeit the outcome is expected to be close to -5.4% of GDP (-5.1% in 2025) due to the energy crisis.
Under a no-policy-change scenario, the deficit is expected to reach -6.5% in 2027. Importantly, even the proposed fiscal adjustment is not sufficient to stabilize the public debt as % of GDP, which stood at 118% in Q1:2026 and projected to rise further to 122% by 2027 according to the Budget.
The debate of the draft in the legislature is set to start on October 13th, to last 2 months. Considering the high fragmentation of the current legislature, approval of the 2027 Budget appears challenging.
Rather, as was also the case for 2026, an invocation of Article 49.3 of the French Constitution is likely, under which a bill is automatically adopted unless lawmakers succeed in a vote of no confidence to the government. In any case, political uncertainty in France is expected to be elevated in the next months. French sovereign bond yield spread over Bund widened sharply by +30 basis points (“bps”) wow to 140 bps at the 10-year tenor, the highest since May 2012, with intra-session volatility significantly elevated.
US Treasury long-term yields rose by +10 bps wow and further by +3 bps on October 5th to 5.31% at the 10-year tenor, the highest since April 2002. Its 2-year peer fell by -4 bps wow and was little changed on October 5th to 4.82%, as investors’ expectations eased for an imminent additional hike in the Federal Funds Rate (FFR) at the next meeting of the Federal Reserve on October 28th (probability of 22%) following weaker-than-expected headline non-farm payroll (NFP) data. Indeed, NFPs increased by +29k on net in September, below consensus estimates for +89k.