Euro Zone Bond Yields Diverge Amid Selloff and Rising Inflation
Government bond yields in the euro zone diverged sharply on Thursday and Friday, with investors favoring safe-haven German debt over weaker countries such as France.
The divergence was driven by a selloff in European government bond markets, which left traders seeking refuge in German bonds. The 2-year bond yield for Germany dropped almost 14 basis points, its biggest daily fall since April, while the Dutch 2-year yield fell around 13 bps.
However, French and Italian 2-year yields jumped, with the spread between French and German 10-year yields soaring above the 150 bps mark on Friday. This is the widest it has been since late 2011.
The divergence continued on Friday, but to a lesser extent. Money markets pared back pricing for further interest rate hikes from the ECB, and a further policy increase is now not being fully priced in by traders until early 2027.