Global Market: Eurozone bonds face pressure as energy shock fuels rate hike bets

Eurozone government bond yields were mixed on Thursday after recording their biggest quarterly increase since 2022, as a deepening energy shock continued to fuel expectations of further European Central Bank interest rate hikes through 2027, Reuters reported.

French government bond yields climbed to a fresh 18-year high after recording their biggest quarterly increase in nearly four decades, highlighting growing investor concerns over the country's fiscal position.

According to Reuters, markets have increasingly priced in higher borrowing costs as rising energy prices threaten to keep inflationary pressures elevated, raising concerns about debt affordability in heavily indebted euro zone economies such as France and Italy.

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Germany's benchmark 10-year Bund yield was up 1 basis point on Thursday. It had reached 3.6526% on Monday, its highest level since June 2009, and ended the third quarter around 71 basis points higher.

The rise in yields has been driven in part by expectations that the ECB may need to keep monetary policy tighter for longer as energy costs threaten to push inflation higher.

Oil prices fell on Thursday, however, after recovering crude exports from the Gulf and an unexpected increase in U.S. inventories eased some concerns about supply shortages.

Germany's more policy-sensitive two-year yield rose 1.5 basis points to 3.21%. It had touched 3.3276% on Monday, its highest level since September 2023. The two-year yield rose about 66 basis points during the third quarter, its largest quarterly increase since the final quarter of 2022, the report stated.

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Money markets were pricing the ECB's deposit rate at around 2.81% by December, implying one 25-basis-point rate increase and assigning a 24% probability to a second move. Markets also priced the policy rate at around 3.42% by late 2027, compared with the current 2.50%.

Higher borrowing costs have renewed scrutiny of fiscal sustainability across the euro zone, particularly in countries carrying large debt burdens. Political uncertainty ahead of elections in 2027 has added to concerns about the trajectory of public finances in France and Italy.

The spread between French and German 10-year government bond yields, a key measure of the premium investors demand to hold French debt, stood at 127.51 basis points. It had widened to 128.80 basis points earlier, its highest level since June 2012.

Italy's 10-year yield spread over German Bunds also widened to 104.15 basis points, its highest level since June 2025, underscoring the broader pressure on eurozone government debt markets as investors reassess the outlook for inflation, interest rates and public finances, according to Reuters.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
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