US Interest Rates: Volatility Ahead?

US Rates Brace for Volatility as Data Resumes, Regulatory Shifts Take Hold

Markets are bracing for a return to economic data releases following the resolution of the US government shutdown, but the primary driver of rate movements appears to be shifting from Federal Reserve policy to expectations surrounding regulatory changes impacting Treasury holdings.

The reopening of the government signals a return to economic data flow, a advancement keenly anticipated by US Treasury investors. Implied volatility, measured through swaptions, has begun to climb after reaching multi-year lows, indicating a growing expectation of market fluctuations. Despite this, markets currently price in approximately a 65% chance of a rate cut in December.

Did you know? – Swaptions are contracts that give the holder the right, but not the obligation, to enter into a swap agreement. They’re used to hedge against interest rate risk and speculate on future rate movements.

Any forthcoming data on inflation and jobs will undoubtedly influence the front end of the yield curve. However,the immediate impact is unlikely this week,with potential job numbers expected early next week – though the White House previously indicated that October’s reports might be delayed indefinitely.

Interestingly, the back end of the curve is currently more responsive to anticipated regulatory adjustments than to the optimism stemming from the government’s renewed operation. A widely expected revision to leverage ratio calculations is projected to increase the capacity of larger banks to hold US Treasuries. This prospect has already narrowed the spread between the and swap rate by over 10 basis points in recent months.

According to recent reports,regulatory plans are nearing finalization. This explains the decline in longer-dated UST yields despite the end of the shutdown and generally positive risk sentiment across other asset classes.

Pro tip: – Basis points are a common unit of measurement in finance, equal to 1/100th of 1%.A change of 10 basis points represents a 0.10% shift.

European Bonds Benefit from Positive French Developments

across the atlantic, European bond spreads are tightening on the back of encouraging news from France. The spread of over Bunds has contracted to 73 basis points, its narrowest level since late August.This improvement follows signals from the French government indicating increased confidence in passing a 2026 budget,bolstered by parliament’s vote to suspend pension reform – a key concession to secure the support of the Socialist party.

Furthermore, the Bank of France has signaled an upward revision of the country’s GDP forecasts, citing the economy’s resilience despite ongoing political uncertainty.

Markets are currently inclined towards spread positions, supported by expectations that the will maintain current interest rates for the foreseeable future. Though, analysts caution that France’s fiscal challenges are far from resolved and could resurface as political hurdles mount leading up to the presidential elections in early 2027.

Market Events on Thursday

Today’s economic calendar includes the release of numbers, followed by eurozone industrial production data for September. While a substantial amount of US economic data – including and – would typically be published, these releases are currently delayed due to the recent government shutdown.

On the supply side, Italy is auctioning , and BTPs, totaling €8 billion. the US will also hold a for $25 billion. Yesterday’s 10-year auction experienced a slight tail, but overall demonstrated robust demand.

Reader question: – How might continued political instability in France ultimately impact the Eurozone economy, and what are the potential ripple effects for global markets?

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