US Treasury Secretary comments for the first time on French bond market turmoil, expects no spillover, but confirms safe-haven capital flows back into US Treasuries

US Treasury Secretary Bessent made her first public comments on the turmoil in the French bond market, emphasizing on the one hand that she does not expect spillover effects, while on the other confirming that funds are indeed fleeing from riskier countries such as France into US Treasury bonds for safety. This is the first time that a US official has directly linked France’s sovereign credit risk to the decline in US Treasury yields.

On Tuesday, 20th Eastern Time, Bessent said on the interactive live video media platform 2Way, “I don’t anticipate what’s happening in France to have spillover effects,” adding that France is indeed facing serious challenges, but President Macron’s economic team is “first class” and she knows this team well.

However, Bessent also acknowledged signs of risk aversion: “We have indeed seen funds flowing out of some worrying countries into US Treasuries as a safe haven, and this was unexpected for us.”

The media also noted that the bond market has shown the risk aversion signals mentioned by Bessent. For example, the yield on the benchmark 10-year US Treasury has fallen about 20 basis points from its peak at the beginning of October, and in October, the yield spread between French and German 10-year bonds at one point approached 160 basis points.

Therefore, this rise in US Treasury prices cannot be explained only by domestic inflation or the Federal Reserve’s policy outlook; global demand for safe-haven assets is also a crucial driver. The upheaval in the French bond market is indirectly affecting US Treasury pricing through capital reallocation channels.

Pressure Continues to Build in the French Bond Market

The recent turmoil in the French bond market is not an isolated incident but the continuation of months of ongoing repricing of sovereign credit risk. The yield on French 10-year bonds previously rose as high as 4.963%, the highest since 2002; in October, the spread between French and German 10-year bond yields widened to as much as 159 basis points. Even more notable, at one point France's borrowing costs exceeded Italy’s—even though France is rated three to five notches higher and its GDP is 40% larger.

There has been a structural shift in how markets price France’s sovereign credit risk. The yield on covered bonds issued by French banks was at one point nearly 30 basis points lower than that of French 10-year sovereign bonds, resulting in an inversion between sovereign and covered bond yields.

This inversion means investors now view holding French government debt as riskier than holding French bank-backed assets.

Recently, protests in France have escalated, with violence over the weekend exceeding government expectations, further exacerbating concerns about the government’s ability to control the budget deficit. So far this year, Japanese investors have sold a net 356 billion yen of French sovereign bonds, and the euro has weakened to around $1.1161, both reflecting an international shift in sentiment towards French assets.

US Treasuries Become a Safe Haven as French Spillover Risk Remains to Be Seen

Bessent’s speech placed the decline in US Treasury yields in the context of global capital flows. When political and fiscal uncertainty rises in France and other Eurozone countries, US Treasuries, as the world’s most liquid safe-haven asset, become the preferred destination for capital reallocations.

The political deadlock in France has weakened investor confidence in Eurozone risk assets, with some funds leaving Europe’s sovereign debt market in favor of US Treasuries. US Treasury yields have fallen about 20 basis points from their highs in early October against this backdrop.

Although Bessent made clear she does not expect spillover effects, France, as the Eurozone’s second-largest economy, still poses a potential risk transmission channel for regional risk premia. The yield on Italian 10-year sovereign bonds also rose by 11 basis points to 4.58%, indicating that markets are reassessing credit risks among peripheral Eurozone countries.

Bessent’s recognition of the French economic team’s ability is largely diplomatic reassurance; the real market concern is whether the French government can produce a credible fiscal consolidation plan in the midst of political deadlock. Until then, fluctuations in French sovereign bonds will remain an important variable in the global fixed income market.