Last Updated on 29/10/2026
The combination of persistently elevated inflation and a Federal Reserve that has paused further rate increases offers limited reassurance to bond markets. Meanwhile, developments in France and discussions about minimum reserve requirements are likely to attract more attention at the European Central Bank (ECB) meeting than its immediate interest-rate decision.
A Hawkish Fed Outlook Supports Higher Long-Term Yields
The Fed’s latest policy statement contained few signals of a dovish shift, although policymakers decided against raising interest rates. Before the Federal Open Market Committee (FOMC) meeting, the US 10-year Treasury yield had remained close to 4.99%, suggesting that investors were waiting for greater clarity before moving decisively away from the psychologically important 5% threshold.
Following the announcement, yields initially climbed before retreating towards and briefly below 5% after Chair Warsh commented that inflation expectations had become somewhat more contained. His emphasis on achieving price stability at the Fed’s 2% inflation target offered some reassurance to longer-term bond investors.
Nevertheless, inflation remains elevated, and the Fed’s decision to maintain its current policy stance does not necessarily provide sufficient protection against renewed price pressures. Inflation expectations also increased following the announcement and Warsh’s subsequent remarks. These developments support the argument for another move higher in 10-year Treasury yields, potentially towards 5.25%.
At the shorter end of the yield curve, the two-year Treasury yield declined as investors welcomed the Fed’s decision to leave rates unchanged. Markets may believe policymakers are allowing the economy more time to respond to the previous 25-basis-point rate increase. Despite the Fed’s hawkish rhetoric, its actions so far have been relatively limited, leaving open the possibility that its actual policy approach could prove less aggressive than its language suggests. Consequently, yields at both ends of the curve could move in ways that produce a steeper overall curve in the coming weeks.
The Fed’s implementation framework remained largely unchanged, with no significant adjustments to its operating rates or policy mechanisms. The central bank will also continue reinvesting principal repayments from mortgage-backed securities into Treasury bills. Although reducing the Fed’s balance sheet remains a longer-term objective for Chair Warsh, a detailed plan is unlikely to emerge immediately. Further recommendations from relevant committees could become available towards the end of the year.
Meanwhile, liquidity conditions remain relatively stable, with activity in the repurchase agreement (repo) market showing a notable improvement compared with the previous year.
France and Financial Stability Take Centre Stage at the ECB
The European Central Bank is expected to keep interest rates unchanged at Thursday’s meeting, leaving investors focused primarily on its guidance regarding a possible rate increase in December. Markets have already priced in approximately 23 basis points of tightening, meaning that much of the anticipated policy shift is reflected in current valuations.
However, ECB President Christine Lagarde is likely to face more pressing questions about France’s political and fiscal situation and the resulting pressure on its bond market. The ECB could initially attempt to calm markets through less hawkish communication before considering more direct measures, such as suspending quantitative tightening and resuming reinvestments. If these steps prove insufficient, the central bank could eventually consider activating its Transmission Protection Instrument (TPI).
Although the ECB may already have begun using communication to ease market concerns, more substantial intervention remains a difficult prospect. Investors will therefore pay close attention to Lagarde’s comments on the available policy options.
The debate over increasing banks’ minimum reserve requirements has also become less prominent amid the recent bond market turmoil. The proposal was originally discussed as a way to reduce the ECB’s costs associated with quantitative easing. However, minimum reserve requirements may be an overly blunt instrument for achieving this objective, particularly as excess liquidity has already declined towards levels where significant changes could have a more noticeable impact on financing conditions.
Given the existing market pressures, the ECB is unlikely to welcome additional uncertainty or volatility from changes to reserve requirements.
Overall, Thursday’s meeting is not expected to produce a substantial market repricing. A stronger commitment to a December rate increase could push expectations in a more hawkish direction, but with more than 20 basis points of tightening already priced in, the potential market reaction may remain relatively limited.
Key Economic Events and Market Outlook for Thursday
The ECB’s policy meeting will be the main event, although several important economic releases and government bond auctions will also influence market sentiment.
In the United States, September personal consumption expenditures (PCE) inflation data will be closely monitored, with economists expecting core PCE prices to increase by 0.3% month on month. Third-quarter GDP growth is forecast to remain resilient, with an annualised expansion of 3.2%.
In the eurozone, confidence indicators are expected to weaken slightly as higher energy prices and borrowing costs weigh on economic sentiment.
Government bond auctions will also attract attention. Italy plans to issue €7.75 billion in bonds across several maturities, including five-year, seven-year and ten-year securities, alongside ten-year CCTeu instruments. Finland will conduct ORI auctions, while the US Treasury will offer $44 billion in a new seven-year note.
Overall, markets will balance persistent inflation concerns and the prospect of higher long-term US yields against expectations of steady ECB policy. While the Fed’s hawkish stance continues to support upward pressure on Treasury yields, developments in France and incoming economic data could determine the next direction for European bonds and broader financial markets.
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