Euro Zone Bond Yields Retreat from Multi-Year Highs
Euro zone bond yields experienced a slight retreat on Tuesday, easing from multi-year highs as investors reassessed the recent surge in France’s risk premium. The spread between French and German 10-year bond yields narrowed from its peak last Friday, dropping to 128 basis points after hitting a 15-year high of 158 basis points. The selloff was driven by concerns over France’s worsening fiscal situation ahead of next year’s presidential election.
France is expected to submit its 2027 budget on Tuesday, while far-right presidential candidate Marine Le Pen outlined plans to reduce the country’s public deficit to 3 per cent by 2030. Jens Peter Sørensen, chief analyst at Danske Bank, noted that French politicians are becoming more aware of the difficult fiscal situation and are likely to tighten the budget. French Finance Minister Roland Lescure stated that the bond market turbulence had not yet warranted the use of European Central Bank (ECB) policy tools to stabilize borrowing costs.
France’s 10-year bond yield fell by 12 basis points to 4.745 per cent, while Germany’s dropped 4 basis points to 3.452 per cent. Italy’s 10-year bond yield also declined sharply, down 13 basis points to 4.525 per cent. The volatility in the bond market has led investors to scale back expectations for interest rate hikes from the ECB. Additionally, a third consecutive daily decline in oil prices has reduced the need for further tightening, with Brent crude futures down 2.4 per cent to below US$98 a barrel.
ECB officials, including chief economist Philip Lane, have begun questioning the necessity of higher interest rates if rising bond yields impact growth and suppress price pressures. Christoph Rieger, head of rates and credit research at Commerzbank, observed that most ECB members sound less hawkish, though policymakers are still cautious in their comments on the bond market. Markets now predict an 85 per cent chance of another rate hike by the end of the year, down from earlier expectations of at least three more hikes by March. Germany’s two-year yield, sensitive to interest rate policy changes, rose slightly to 3.072 per cent.