In Friday's edition we told you France now pays more than the U.S. to borrow. The weekend paper's bond table shows how thin that gap is. France's 10-year closed at 5.037%. The U.S. closed at 4.987%. Italy, long the country lenders fretted over, closed at 4.582%.
Here's what moved. On Thursday France's 10-year yielded 5.076% and the U.S. 4.952%. On Friday France fell to 5.037% while the U.S. rose to 4.987%. The gap shrank to 4.5 basis points from 11.9. A basis point is a hundredth of a percent, so that's a sliver. The U.S. yield rose because oil jumped and inflation fears came back, Hannah Erin Lang writes in the Journal's week wrap. Thursday had gone the other way. A tech scare sent money into Treasurys, and yields had their biggest one-day drop in three years.
The bigger story is the year. Last October France borrowed for ten years at 3.379%. The U.S. paid 3.988%. France was 62.6 basis points cheaper. A month ago France paid 4.644% against 5.113% here, still under. Now it's over. Germany, Europe's benchmark borrower, pays 3.362%. So France pays about 1.7 points more than its neighbor (5.037% against 3.362%). Spain pays 4.047%. Britain pays 5.369% and Australia 5.174%, so France isn't the dearest borrower on the page. It's the one whose yield climbed the most over the year.
Short loans still cheap, long ones not
Look at the two-year line and the story flips. France borrows for two years at 3.784%. The U.S. pays 4.680% for two years. So on short loans France is still the cheaper borrower, by 90.6 basis points. Lenders aren't worried about France next year. They're worried about France in 2036. That's what a steep curve says. The U.S. curve is flatter, 4.680% to 4.987%. Our short rates are high because the Fed raised them this year. France's long rate is high because lenders have doubts about its budget, as we wrote Friday.
Our read
This is Fixed Income, IN02. The lesson in this table is about time. France just happens to be the example. Lenders will fund a country for two years at a discount and charge a premium for ten. The same thing happens inside a retiree's bond fund. The longer the loans in it, the more it swings when doubt shows up. The U.S. 10-year ran well above 5% in the two-month rout, then dropped the most in three years in one day. That's a bumpy ride for money that's meant to be the calm part of the plan. The desk keeps safe money short, in Treasury bills and floating-rate paper. SGOV is in 49 books and USFR in 14. The 7-to-10-year Treasury fund IEF is in 11 books and TLT in 4, all held at weight. Nothing added. France is a watch item, not a holding.
Your connection is the bond fund in your 401(k) or IRA. Most people never ask how long it lends. This week, open its fact sheet and find the line called average maturity or duration. Either one tells you roughly how many years of doubt you're carrying. If it's longer than you expected, that's worth a talk at your next review. You check the roof before the rainy season. The quiet side of a plan deserves the same look.