Government bond yields across Europe have climbed to levels not seen since the global financial crisis, as investors brace for prolonged inflation driven by the escalating conflict in the Middle East. The fighting shows no sign of abating, and the threat to energy supplies is keeping crude prices elevated, which in turn pressures central banks to consider further monetary tightening.
On Friday morning, Germany's 10-year Bund yield hovered around 3.5%, while France's equivalent stood at roughly 4.44%—about 94 basis points higher. Italy's 10-year yield reached approximately 4.37%, and Spain's was near 3.96%. These figures reflect a rapid repricing of sovereign risk across the eurozone.
The European Central Bank raised its deposit rate to 2.5% on Thursday, a move that was widely expected, but its accompanying statement struck a more hawkish tone than many had anticipated. The ECB warned that inflation could remain "well above target for an extended period," prompting investors to increase their bets on further rate hikes.
In the UK, the 10-year gilt yield eased to around 5.35% on Friday as energy prices retreated from Thursday's peaks, but it had earlier touched 5.378%—the highest since 2007. Longer-dated gilts also surged, with 20- and 30-year yields reaching levels last seen in 1998.
Energy and geopolitics drive the sell-off
The deterioration in the outlook for crude supplies has been a key driver. Yemen's Iran-backed Houthi rebels have struck several Saudi energy targets and advanced toward the Bab el-Mandeb Strait, a vital alternative route for global energy shipments while the Strait of Hormuz remains effectively closed. International benchmark Brent crude has traded above $100 a barrel in recent days, with the front-month contract near $106 on Friday morning.
These developments have reignited fears of a sustained inflation shock, which would force central banks to keep borrowing costs higher for longer. The ECB's own forecasts now see inflation staying above target for an extended period, a message that resonated across markets.
Across the Atlantic, long-term US Treasury yields also hit multi-year highs after data showed an increase in wholesale inflation, fueling expectations that the Federal Reserve could raise rates next week. The 30-year Treasury yield climbed above 5.38%, its highest since 2007, while the 10-year yield approached the closely watched 5% mark, trading around 4.95% on Friday morning in Europe.
Additional pressure came from a US Treasury buyback operation that fell short of expectations. The Treasury purchased $5.2 billion (€4.5 billion) of bonds, below the $6 billion cap and less than half the $10.5 billion offered by investors. The shortfall added to the sense of oversupply in the market.
In Asia, Japan's 10-year government bond yield rose to around 2.98%, just below the 3% level it reached earlier this month for the first time since 1996.
AI debt competes for investor capital
Governments are seeking to attract investors at a time when a flood of artificial intelligence-related debt is also hitting global markets. Major hyperscalers, including Alphabet and Amazon, have issued more than $200 billion (€172 billion) of debt so far in 2026—more than double the amount raised in all of last year, according to LSEG data reported by Reuters. A broader Goldman Sachs estimate, which includes debt tied to data centres and other AI infrastructure, puts AI-related issuance at nearly $500 billion (€431 billion) by early August.
US technology companies are increasingly turning to the eurozone bond market to finance their investments. They are expected to require more than $1 trillion (€862 billion) in total capital expenditure by 2028, according to an ECB blog post published on 31 August. The euro accounts for close to 10% of the outstanding bonds issued by these hyperscalers, giving European bond investors greater exposure to technology companies.
This is particularly significant because technology makes up a much smaller proportion of eurozone bond indices—its weight is roughly one-third of that in comparable US indices. ECB researchers said the growing presence of hyperscalers could eventually push up borrowing costs across different sectors. Investors may sell or avoid other bonds to make room in their portfolios for large technology-company issues, forcing competing borrowers to offer higher yields.
The researchers noted that this pressure could potentially spread to government and supranational bonds. However, they stressed that no such spillovers were evident in the eurozone at the time of their analysis, reflecting the still-limited scale of big-tech issuance and the resilience of sovereign bond markets.
As the global sell-off continues, European governments face the dual challenge of managing their own borrowing costs while competing with a wave of corporate debt. The coming weeks will be crucial in determining whether yields stabilise or push even higher.
