Europe's Borrowing Costs Skyrocket Amid Decade-High Real Yields

Europe's governments are facing a borrowing-cost risk due to decade-high real bond yields, according to recent market data. Inflation-adjusted government bond yields in Germany and Britain have reached their highest levels in more than a decade.

The increase in real yields is part of a wider global trend, with US 30-year real yields near 18-year highs at about 3 per cent. This represents a rise in the underlying price of capital rather than simply compensation for faster price growth.

For Europe, this repricing comes at an awkward moment as governments want to finance rearmament, grids, clean energy, digital infrastructure, and industrial policy. However, investors are demanding a larger inflation-adjusted return to absorb additional debt.

The rise in real yields can make shares less attractive because investors receive a better inflation-adjusted return from bonds. Despite this, equity markets have remained strong, supported by corporate earnings and resilient growth.