Bond Yields Steady Ahead of French Election and Key Inflation Data

German and French government bond yields saw minor changes on Thursday, with French 10-year bond yields peaking at 3.278% and German yields at 2.442%. The risk premium on French debt neared a seven-year high, as investors focused on the upcoming French election and awaited inflation data from the U.S. and Europe. Markets remain volatile, influenced by inflation concerns and potential changes in central bank policies.

German government bond yields were little changed on Thursday after rising to their highest levels in two weeks, while the risk premium investors demand to hold French debt widened to within striking distance of a seven-year high reached two weeks ago.

France's 10-year bond yield rose to 3.278% in early trading, the highest since June 11, and was last up 4 bps. Germany's equivalent, the benchmark for the euro zone, was last at 2.442%, having earlier touched 2.482% in early trading, the highest since June 13. Yields move inversely to prices.

That meant risk premium investors demand to hold French debt widened, with the so-called spread between French and German 10-year yields rising back above 81 bps, close to the 82 bp level hit on June 14. Attention remains on the French election, where Marine Le Pen's National Rally (RN) continues to lead in

polls , but looks likely to fall short of an absolute majority in the National Assembly.

"Markets remain volatile ahead of this weekend's French election," said Citigroup strategists in a note. Worries about possible contagion have kept Italian bond yields elevated. Italy's 10-year yield climbed to 4.044%, the highest since June 12.

Italian bonds' spread over their German peers also rose, up to 157 bps. The spread hit its widest since mid-February on June 14 at 159 bps as investors bought German bonds. Meanwhile investors were waiting for inflation data from the United States and Europe for hints about future monetary policy moves.

Stronger-than-expected inflation prints from Australia and Canada this week have reminded markets that the battle against price rises is ongoing. U.S. personal consumption expenditure (PCE) inflation data for May is due on Friday, and is likely to guide Federal Reserve policy and have knock-on effects for other central banks.

Piet Haines Christiansen, chief strategist for fixed income research at Danske Bank, said investors were also looking towards next week, when euro zone inflation figures for May will be released and the European Central Bank's annual Forum on Central Banking will take place in Portugal. France and Spain are among the countries to release inflation data on Friday, ahead of the euro zone-wide number.

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