The selloff in eurozone government bonds eased on Thursday, but yields remained close to multi-year highs as stronger economic activity and elevated oil prices reinforced expectations that the European Central Bank may need to tighten monetary policy further.
Germany's 10-year government bond yield, the benchmark for the euro zone, was little changed at 3.547%, remaining just below a 17-year high of 3.5723% reached last week. Bond yields move inversely to prices.
According to Reuters, the recent bond selloff has been particularly pronounced in heavily indebted euro zone countries such as France and Italy, where borrowing costs have risen more sharply.
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French borrowing costs climb
France remained at the centre of investor attention as the country approaches the 2027 election year with a sizeable primary deficit and budget risks linked to its fragmented parliament.
France's 10-year government bond yield was broadly steady at 4.655% on Thursday after earlier touching its highest level in more than 18 years.
The spread between French and German 10-year bond yields widened beyond 110 basis points, reaching its widest level since mid-2012. A wider spread generally indicates that investors demand a higher premium to hold French government debt compared with German bonds.
The bond selloff intensified on Wednesday following stronger-than-expected business activity data from both the euro zone and the United States.
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Markets price further ECB tightening
The rise in bond yields has been driven partly by expectations that resilient economic activity, combined with higher energy prices, could keep inflationary pressures elevated and prompt further interest-rate increases.
Reuters reported that money market futures were pricing around 35 basis points of ECB tightening by the end of the year. That implied one quarter-percentage-point rate increase, along with roughly a 40% probability of another hike.
Germany's two-year government bond yield, which is particularly sensitive to changes in expectations for ECB policy, was flat at 3.288% on Thursday.
The move in euro zone bonds has also been accompanied by a sharp rise in U.S. Treasury yields. The 10-year U.S. Treasury yield climbed as much as 16 basis points on Wednesday to its highest level since July 2007, marking its biggest one-day increase since the so-called Liberation Day market rout in 2025.
With oil prices remaining elevated and economic activity showing resilience, investors are reassessing the path for global interest rates and the potential for borrowing costs to remain higher for longer.
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