Eurozone government bond yields eased on Tuesday, bringing a brief pause to a selloff that had pushed borrowing costs to multi-year highs. According to The Economic Times, Germany's benchmark 10-year government bond yield was last down 2 basis points at 3.625%, while the benchmark euro zone 10-year yield was also heading lower for the first time in six sessions after climbing to 3.6526% on Monday, its highest level in 17 years. The retreat came as investors continued to assess the impact of strong economic growth and elevated energy prices on the global interest-rate outlook. Energy prices remain key inflation risk as Brent crude was trading above $107 a barrel on Tuesday, with uncertainty over efforts to end the Iran conflict keeping energy markets volatile.
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. As reported by Reuters, France's 10-year OAT yield rose to 4.6%, marking its highest level since July 2008, with the yield gaining 45.18 basis points over the past 4 weeks and 100.85 basis points in the last 12 months. 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 following stronger-than-expected business activity data and concerns over France's public finances, as the budget deficit is now expected to widen to 5.4% of GDP this year, up from 5.1% in 2025.
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. According to The Economic Times, money markets were pricing almost four additional 25-basis-point ECB rate increases, on top of the two hikes delivered over the summer. ECB President Christine Lagarde said on Monday that a measured policy response remained appropriate because the recent inflation surge had not yet produced dangerous second-round effects, while highlighting the risk that rising long-term bond yields could weigh on economic growth. The ECB has previously pushed back against the idea that interest rates will automatically move in line with energy prices, stressing that policymakers also have to account for the impact of higher energy costs on consumption and economic growth. Economists widely expect the ECB to leave rates unchanged at its October 29 meeting and potentially consider another increase in December.
Investors are now turning their attention to flash inflation data due later this week, with euro zone inflation expected to accelerate to 3.6% in September from 3.2% in August, according to a Reuters poll. The anticipated increase is largely linked to higher energy prices, although investors and policymakers will also closely monitor services and food inflation for signs that broader second-round price pressures are emerging. Eurozone inflation has already moved above 3% and could approach 4% by the end of the year, increasing pressure on the ECB even as policymakers remain wary of the impact of tighter financial conditions on growth. Germany's more rate-sensitive two-year government bond yield, which is particularly sensitive to expectations for ECB policy rates, fell about 2 basis points to 3.281% on Tuesday, after reaching a three-year high on Monday. The moves underline the renewed pressure on euro zone bond markets as investors assess the combined impact of higher energy costs, persistent inflation risks and the prospect of further interest-rate increases.
