Government bond markets across Europe steadied on Friday morning after a turbulent session on Thursday, when borrowing costs in France, the UK, and the US surged to levels not seen in decades. The retreat in yields came as Brent crude slipped about 2% to around $99.95 a barrel, tempering fears that the energy shock would keep inflation elevated and force central banks into further rate hikes.
In the UK, the yield on 30-year gilts fell to roughly 5.92% after climbing above 6% on Thursday for the first time since 1998. The 10-year yield dropped to about 5.37%, below the 19-year high reached earlier this week, while the two-year yield slid more than six basis points to around 4.77%. Thursday's sell-off also hit British bank shares, with NatWest, Lloyds, HSBC, and Barclays falling between 4% and 5%. The losses deepened after Sky News reported that Chancellor John Healey had summoned bank bosses to a meeting ahead of his 28 October budget, fuelling speculation about new bank taxes.
France in the firing line
France's 10-year yield hit 4.96% on Thursday, its highest since July 2002, before easing to about 4.92% on Friday at 11 am CEST. The extra yield investors demand to hold French rather than German debt reached over 140 basis points this week, the widest gap since 2012. That spread jumped 13.9 basis points on Thursday, its biggest daily rise since March 2020, according to Deutsche Bank strategist Jim Reid. "The daily moves were reminiscent of the Euro crisis in many respects, with sovereign contagion a big talking point," Reid told clients in a note.
The sell-off came as Paris unveiled a 2027 budget seeking €43 billion in new savings to cut the deficit from 5.4% of GDP this year to 5% next year. Public debt stands at a post-war record of 119% of GDP, and France plans to borrow a record €340 billion next year. Finance Minister Roland Lescure sought to reassure markets: "Here and there, I hear the prophets of doom promising us worse times ahead. I would like to reiterate here that France's signature is solid."
France's fiscal watchdog, the High Council of Public Finances, was less upbeat, calling the government's 1% growth forecast for 2027 optimistic and a return below the EU's 3% deficit limit by 2029 very unlikely. "With a difficult political process ahead, French bonds are likely to remain under pressure, while the threshold for ECB intervention remains high," ING analysts wrote. Far-right leader Marine Le Pen leads polls ahead of next spring's presidential election.
Fresh figures added to the inflation worries behind the sell-off. Eurozone inflation jumped to 3.8% in September, its highest in three years, up from 3.2% in August, according to Eurostat's flash estimate published on Friday. Economists had expected 3.6%, and Spain's annual rate hit 5%. It was the seventh month in a row above the European Central Bank's 2% target, as traders expect the ECB, which raised rates in June and September, to lift its deposit rate by another quarter point to 2.75% by year-end.
US Treasuries retreat from 24-year high
In the US, the 10-year Treasury yield rose to 5.34% on Thursday, its highest since 2002, before pulling back to around 5.26%. Surging energy costs are stoking inflation, while the AI and data-centre boom competes for capital. After a rate hike in September, markets expect at least three more from the Federal Reserve by mid-2027. "As yields have crept higher, that is going to tighten financial conditions and could increase the risk of a slowdown," said Danny Zaid, portfolio manager at TwentyFour Asset Management.
Overall, the bill is mounting. Developed economies paid more than $3.3 trillion (€2.9tn) in interest on internationally traded government bonds over the past year, according to the Washington-based Institute of International Finance, which is more than the estimated global spending on defence or AI.
The recent moves in French and UK bond markets echo earlier episodes of fiscal stress. France's borrowing costs hit a 22-year high earlier this year as debt worries deepened, and oil rebounded above $100 as US bonds suffered their worst quarter since 1994. The current environment, with fuel costs eating into household budgets across the continent, adds to the pressure on governments and central banks alike.
