Borrowing costs across Europe's largest economies have surged to their highest levels in over 15 years, as a renewed global bond sell-off intensifies. The rout pushed Germany's benchmark 10-year Bund yield above 3.36% on Tuesday, its highest since 2008, before easing slightly to around 3.34%. France, Italy, the Netherlands, and Spain all saw similarly steep increases.
Bond yields move inversely to prices: when investors sell bonds, prices fall, and the fixed interest payment becomes more valuable relative to the lower price, pushing yields up. In essence, the more bonds are sold, the more expensive it becomes for governments to borrow.
The pressure on sovereign debt stems from rising oil prices and increasingly hawkish signals from major central banks, reinforcing expectations that interest rates will stay higher for longer. Germany's 30-year Bund yield also surged above 3.84%, its highest since 2011. France's 10-year OAT yield rose to its highest level since November 2008, trading slightly above 4.215% on Tuesday morning. Italy's equivalent yield was slightly lower at 4.188%, while the Dutch 10-year yield climbed to 3.43%, its highest since May 2011. Spain's 10-year yield exceeded 3.80%, a level not seen since November 2023.
Inflation and central bank policy
Investors are worried that higher energy prices will fuel inflation globally, potentially prompting rate hikes by the US Federal Reserve, the Bank of Japan, and the European Central Bank (ECB). These concerns were reinforced on Tuesday morning when Eurostat's flash inflation data showed eurozone inflation accelerated to 3.3% in August, up from 2.9% in July, driven by a 14.3% year-on-year surge in energy prices. This is well above the ECB's 2% target.
The ECB is due to hold its next monetary policy meeting next week, and most investors expect a 25-basis-point rate hike. Leo Barincou, senior economist at Oxford Economics, said: “With inflation still accelerating, the ECB is all but certain to hike at next week’s meeting, in line with our expectations.”
In the US, higher energy prices have added to stubborn inflation, which remains above the Fed's 2% target. According to Bloomberg, traders now price in about a 70% chance of a September rate hike, following Federal Reserve Chair Kevin Warsh's renewed pledge to tame inflation. The sell-off also spread to Asia, where Japan's 10-year government bond yield reached 3.00% for the first time since 1996.
France's fiscal vulnerability
While Germany's Bund has moved largely in line with global benchmarks, France faces an additional risk premium due to its political and fiscal outlook. French 10-year borrowing costs have exceeded Italy's for much of the summer, as France increasingly becomes the focus of European debt concerns. According to the IMF, France's gross government debt is projected to reach 118.4% of GDP this year and 120.5% by 2027, giving it the third-highest debt-to-GDP ratio in the EU, after Greece and Italy. The Banque de France expects the budget deficit to hit 5.2% of GDP this year, and difficult budget negotiations ahead of the 2027 presidential election have raised doubts about the government's ability to reverse this trend.
Robert Timper, chief fixed-income strategist at BCA, told Euronews Business: “We have held the view for some time that France is the country in the euro area with the most unsustainable fiscal outlook, and its borrowing cost should reflect that.” He added: “To get back to a sustainable fiscal path, France needs to do substantial reforms, which will be unpopular as they will curtail welfare spending. A large political majority is therefore necessary for such reforms, or a bond market riot will force reforms.”
The global bond sell-off is testing the traditional role of government bonds as safe-haven assets. Investors are increasingly concerned that global conflicts and higher energy prices could produce a prolonged period of stagflation—a combination of high inflation and weak or zero economic growth. As eurozone inflation accelerates, the pressure on central banks to act grows, but the risk of choking off growth remains.
For now, the market's message is clear: governments across Europe will have to pay more to borrow, and those with weaker fiscal positions, like France, will feel the pinch most acutely. The coming weeks will show whether the ECB's next move can calm the storm or if the sell-off has further to run.
