European Bond Yields Spike to 15-Year Highs on Inflation Fears

European bond yields surged to 15-year highs on Tuesday, driven by inflation and rate hike bets. Germany's benchmark cost of borrowing hit a 15-year peak, with France, Italy, and the Netherlands also seeing sharp increases.

The 10-year Bund yield surpassed 3.36% before easing slightly to trade near 3.34%. France's 10-year OAT yield reached its highest level since November 2008, trading just above 4.215%, while Italy's equivalent yield was slightly lower at 4.188%. The Dutch 10-year government bond yield rose to 3.43%, its highest since May 2011.

Investors are worried that rising energy costs will stoke inflation worldwide, prompting rate increases from central banks in the US, Japan, and the eurozone. Eurostat's latest flash inflation data revealed energy prices were 14.3% higher than a year earlier, contributing to eurozone inflation reaching 3.3% in August.

Leo Barincou, senior economist at Oxford Economics, noted that with inflation still accelerating, the ECB is almost certain to raise rates at next week's meeting. France's gross government debt is projected to hit 118.4% of GDP this year and 120.5% by 2027.

The persistent inflation expectations and rising borrowing costs also drove the 10-year US Treasury yield to its highest level since January 2025, trading around 4.78%. Traders have raised the probability of a September US rate hike to roughly 70%, extending a repricing that began last week.