European Bond Yields Ease Amidst Rising Treasury Yields and Record Mortgage Rates
The European bond market experienced a brief respite on Friday morning after a brutal sell-off, with yields easing slightly. The yield on France's 10-year OAT dropped to around 4.67%, down from 4.7% earlier in the day, while Germany's 10-year Bund saw its yield decrease to approximately 3.59%, down from 3.61%. This minor relief comes after a sharp bond rout.
The gap between French and German 10-year borrowing costs widened to over 110 basis points this week, its largest since the 2012 eurozone debt crisis. Investors are increasingly concerned about France's debt and election risks, exacerbated by ratings agency Scope's downgrade of France. The cost of insuring French debt against default has also surged to nearly a decade high.
However, the bigger story was in the US, where the 30-year Treasury yield reached its highest level since 2004, touching around 5.5%. This was driven by a fresh jump in oil prices and persistent inflation concerns. The 10-year Treasury yield, which anchors US mortgage rates, has also climbed to levels last seen in 2007.
US homebuyers are feeling the pinch as the average 30-year mortgage rate hit 7% this week, roughly a percentage point above where it stood before the Iran war began and its highest level since President Donald Trump took office in January 2025. Nick Saunders, CEO of online investment platform Webull UK, attributed the unusual simultaneous decline of bonds and stocks to inflation.
According to Saunders, 'Bonds and stocks are falling due to inflation.' Energy shocks and war have pushed prices higher while growth has slowed, making normally falling stocks less appealing. Saunders pointed out that interest rates have not fallen as expected, making the traditional safe haven of bonds less attractive.