Eurozone Bond Market Under Pressure as Energy Costs Fuel Inflation Expectations

The eurozone bond market is under pressure due to rising energy costs and inflation expectations. This has led to higher borrowing costs, with French yields reaching an 18-year high and spreads for French and Italian debt widening amid fiscal concerns.

According to Reuters, markets have increasingly priced in higher borrowing costs as rising energy prices threaten to keep inflationary pressures elevated, raising concerns about debt affordability in heavily indebted eurozone economies such as France and Italy.

The European Central Bank's (ECB) deposit rate is expected to reach around 2.81% by December, implying one 25-basis-point rate increase and assigning a 24% probability to a second move. Markets also price the policy rate at around 3.42% by late 2027, compared with the current 2.50%.

Higher borrowing costs have renewed scrutiny of fiscal sustainability across the eurozone, particularly in countries carrying large debt burdens. Political uncertainty ahead of elections in 2027 has added to concerns about the trajectory of public finances in France and Italy.