TS Pulse: French fried

As France’s debt spreads continue to widen, discussion has moved to how far they can go and if, how, and when the ECB could step in.

• French 10-year spreads to Bunds reached 142bps on Monday as doubts grow over the government’s ability to cut its deficit. Markets are still functioning normally and the move reflects genuine fiscal concerns, so in our view the ECB is unlikely to step in. Its backstop, the TPI, is reserved for disorderly selloffs that aren’t justified by fundamentals, and requires countries to stick to EU budget rules. It could, however, be used if France’s troubles triggered a disorderly selloff in other countries’ bonds. The real cliff-edge is ratings: Moody’s (Aa3, negative outlook) reports on 23 October, and a downgrade would leave France without an AA-category rating from any of the three major agencies.
• Minutes of the Fed’s September meeting, released last week, showed all participants backed the decision to raise interest rates to guard against the risk of intensifying inflation pressures. The minutes noted that “beyond the current meeting, most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end”. The commitment to further tightening was justified by “almost all participants” assessing that inflation risks were “tilted to the upside”, while labour market risks were “broadly balanced”. Markets price a 19% chance of an October hike, but a full hike by December.
• The ECB’s account of its September meeting revealed a unanimous decision to tighten, with policymakers judging the energy shock more persistent than expected and inflation risks skewed higher. Yet the Governing Council stopped short of guiding towards further hikes, pointing to the absence of second-round effects so far and the potentially material drag from higher long-term yields. Money markets see little chance of a move on 29 October, whilst a December hike is almost fully priced.
• European credit spreads are at some of the widest levels seen since the start of the Iran-US conflict. The iTraxx Crossover index reached a level not seen since April, while the Bloomberg euro corporate index this month hit its highest level since May last year. Add in higher benchmark government bond yields and borrowing is materially more expensive than it has been for some time. 
• UK like-for-like retail sales rose 1.0% in September, double August’s pace, according to the BRC-KPMG monitor, which cited household caution ahead of expected rises in bills and taxes. With total sales growth of 1.3% only roughly matching shop price inflation of 1.4%, volumes were broadly flat. Despite soft demand, markets price a 90% chance of a BoE hike on 5 November, with the Bank expecting inflation to rise to slightly above 4% in early 2027 as energy costs feed through.

Source: Bloomberg; pricing as per 13 October 2026

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