Europe's Bond Markets Under Pressure from Inflation and Fiscal Risks

Government borrowing costs across Europe have risen to multi-decade highs due to persistent inflation concerns and expectations of higher interest rates. The European Central Bank projects the eurozone government deficit to rise from 2.9 percent of GDP in 2025 to 3.7 percent in 2027, with debt approaching 90 percent of GDP by 2028.

The global bond sell-off has pushed up borrowing costs across Europe, with Germany's 10-year Bund yield reaching 3.38 percent, its highest level since April 2011. France's five-year and 10-year yields have both risen by around 60 basis points in just over two months, with the 10-year yield briefly exceeding 4.20 percent, its highest level since October 2008.

Italy's 10-year bond yield rose to 4.22 percent, its highest since November 2023, while Poland's benchmark 10-year yield climbed back above 6 percent after trending higher since July. The pressure has also spread to traditionally highly rated countries such as the Netherlands, with the yield on 10-year Dutch government bonds rising to approximately 3.43 percent on Tuesday, its highest level since May 2011.