European government bond markets found some respite on Friday morning, with yields easing after a brutal week of selling. The yield on France's 10-year OAT slipped to around 4.67%, down from roughly 4.7% earlier, while Germany's 10-year Bund yield fell to about 3.59% from 3.61%. The moves are modest, but they follow one of the sharpest bond routs in recent memory.
The most striking development has been in France. The gap between French and German 10-year borrowing costs—the clearest measure of the risk premium investors attach to Paris—blew past 110 basis points this week, its widest since the eurozone debt crisis of 2012. That widening reflects deepening concerns about France's fiscal position and the political uncertainty surrounding upcoming elections. Ratings agency Scope downgraded France's credit rating, adding to the pressure, and investors are also bracing for a possible 2027 presidential run-off between the far right and the far left. The cost of insuring French debt against default has climbed to its highest in nearly a decade.
But the bigger story has been across the Atlantic. The 30-year US Treasury yield touched its highest level since 2004, reaching around 5.5%, as a fresh jump in oil prices compounded worries about persistent inflation and swelling government debt. The 10-year Treasury yield, which anchors US mortgage rates, hit levels last seen in 2007. American homebuyers are feeling the pinch: the average 30-year mortgage rate reached 7% this week, roughly a percentage point above where it stood before the Iran war began, and its highest since President Donald Trump took office in January 2025.
Why bonds and stocks are falling together
The unusual feature of this episode is that bonds have stopped acting as a safe haven precisely when stocks have wobbled. Normally, falling equities would drive investors into government debt, but this time both asset classes are sliding.
“Bonds and stocks are falling due to inflation,” said Nick Saunders, CEO of online investment platform Webull UK. Energy shocks and war have pushed prices higher while growth has slowed, and with interest rates not falling, “the traditional safe haven” is less appealing. Saunders drew a parallel with the early 1970s, when a similar combination of energy shocks and wage pressure sent UK gilt yields soaring while stocks fell 73%. He noted, however, that today's economies are far less oil-intensive and labour markets have more slack to absorb creeping inflation.
Inflation-linked bonds, gold, and other assets decoupled from stocks offer some shelter, Saunders said, though “it would be wrong to abandon bonds entirely.”
Oxford Economics takes a calmer view of the broader move. “We see the interest rate spike as mostly temporary, largely reflecting a repricing of monetary policy responses to surging energy prices,” said lead economists Ricardo Amaro and Daniel Kral. They added that most government budgets can absorb higher rates given the long average maturity of their debt.
The sell-off has also been felt in European equities, with major indices under pressure. The situation is being closely watched by policymakers in Brussels and national capitals, as higher borrowing costs could complicate efforts to fund green transitions and defence spending. The latest European morning briefing highlighted these concerns, noting that the bond market turmoil comes at a delicate time for the bloc's fiscal rules.
For now, the relief in European bonds is tentative. Investors remain wary of further volatility, especially if US inflation data continues to surprise to the upside. The ongoing US-China trade truce and the EU's defence priorities are also factors that could influence market sentiment in the coming weeks.
