Eurozone government bond yields are heading for a seventh consecutive weekly rise, as higher energy prices and increasingly hawkish messages from central banks strengthen expectations of further interest rate hikes. Oil prices eased slightly on Friday as markets weighed the prospect of a ceasefire between the United States and Iran against Houthi strikes on Saudi Arabia from Yemen, but they are still on course for a weekly gain of 1.5%.
The yield on Germany’s benchmark 10-year bond fell by half a basis point to 3.60%, after touching 3.6114% on Thursday, its highest level since June 2009. It is set for a weekly rise of eight basis points. The German two-year yield, which is more sensitive to interest rate expectations, held at 3.29%, having reached 3.3269% the previous day, its highest since September 2023. Investors have increased their bets on policy rate hikes, pushing borrowing costs higher and raising questions about debt sustainability in the eurozone’s most heavily indebted economies.
France under pressure as Italy recovers
French and Italian bonds moved in opposite directions over the week, with French debt remaining under pressure while Italian government bonds staged a modest recovery. The spread between French and German bonds, a measure of the risk premium investors demand to hold French debt, is heading for its fourth consecutive weekly rise. It widened by four basis points, reaching as much as 114.06 basis points, the highest level since June 2012, and stood at 108 basis points on Friday. Emergency spending to ease the burden of energy costs has further strained France’s already stretched public finances, putting its deficit reduction target out of reach.
The 10-year yield stood at 4.69% for France, 4.53% for Italy, 4.08% for Spain and 4.41% for Greece. The Italian spread is heading for a small weekly decline of one basis point, after reaching 99.90 basis points, its highest level since March 2026. It was last at 90.50 basis points.
“Italy’s deficit trajectory, primary balance and fiscal credibility have improved significantly, strengthening its bonds,” said Ugo Montrucchio, head of investments at Schroders. “By contrast, France appears increasingly vulnerable as its deficit and debt metrics deteriorate.”
Markets price in ECB hikes
Money markets expect the European Central Bank’s deposit facility rate to rise to 2.86% by December, implying a 25 basis point hike, with the probability of a second move estimated at just under 50%. Markets also forecast that the key policy rate will reach 3.46% by the end of 2027, compared with 2.50% today.
Source: CNA
