Week Ending: October 23, 2026
Sour OATs
Spread Between French And German 10-Year Government Bond Yields
Let’s play a guessing game. Take two countries: Country A carries net debt worth 97% of its economic output; Country B carries 108%, but that’s where the similarity ends. Retirement benefits cost 14% of Country A’s budget, with 18% of the population over 65. In Country B, retirement benefits take up 24% of total government spending, and 23% of residents are 65 or older. More importantly, Country A's economy has grown 16.3% cumulatively since 2019, while Country B has grown 6.3%. Country A is also outgrowing its 10-year borrowing cost, while Country B’s borrowing cost exceeds its growth. Who are Countries A and B? Jot down your answers before reading on. Ready? Country A is the U.S.; Country B is France. Despite similar debt-to-GDP ratios, France is in a more brittle fiscal position than the U.S., which helps explain why French 10-year OAT yields blew out to 174 basis points above German Bunds this week, the widest spread since the 2011 eurozone crisis. Fiscal sustainability depends on more than spending. As developed economies globally face aging populations, government spending will only rise from here. But the country that grows fast enough, driven by productivity, can sustain higher rates while keeping its debt burden contained.
Total Returns By Asset Class
Highlights of the Week:
Corporates: Issuance was front-loaded this week, with $18 billion in supply, as issuers stood down on Thursday due to higher interest-rate volatility. With the risk-off sentiment, rates rallied aggressively, and investment-grade (IG) spreads widened three basis points (bps) to an option-adjusted spread of 87 bps.
Municipals: Municipals continued their October recovery, with short maturities leading gains despite a growing supply calendar. Funds attracted $1.6 billion for the week ending October 21, as exchange-traded fund (ETF) inflows again outweighed open-end redemptions. Continued tax-loss selling also created pockets of value: some 15–20-year bonds traded at wider spreads than comparable new issues, reversing the usual new-issue advantage.
Equities: The U.S. equity market finished the week little changed, despite a pickup in volatility. Mixed third-quarter earnings results and continued geopolitical uncertainty weighed on investor sentiment. Most sectors advanced, led by health care, energy, and consumer staples. Communications and industrials were the only sectors to decline.
Securitized Products: Issuance in the non-qualified mortgage market has slowed since September as rates rose. Spreads have widened as investors evaluate extension risk. Deals backed by collateral with low mortgage rates that pay the lowest coupons have faced the most pricing pressure. The closed-end second-lien market remains resilient due to higher collateral mortgage rates.
Disclosure: This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed.
