France’s 10-year OAT yield marginally fell to 3.56%, retreating from a 14-year high of 3.6% hit on December 22, as the global bond selloff paused. Despite the short-term dip, yields remain elevated amid fiscal uncertainty and a budget impasse. Lawmakers failed to agree on the 2026 budget last Friday, prompting Prime Minister Lecornu to push emergency legislation extending spending into January to prevent a government shutdown. The full budget is expected to pass in early January. ECB hawk Isabel Schnabel signaled that she does not expect an imminent rate hike, but persistent inflationary pressures imply that monetary tightening will eventually be necessary. Market pricing currently reflects about a 40% probability of an ECB rate increase by March 2027, broadly in line with post-meeting expectations. Elsewhere, the Bank of Japan signaled a more hawkish outlook, indicating the possibility of future rate hikes, while US markets continue to price in rate cuts extending through 2026.
