Euro zone bonds stabilise after bruising week
TLT•Euro zone bonds stabilised after a volatile week as investors sought safe-haven German and Dutch debt, while French borrowing costs reached a 14-year high. September inflation rose to 3.8% from 3.2%, and traders no longer fully price another ECB rate increase until early 2027.
1. Bonds diverge across Europe
German 10-year yields fell as much as 13.7 basis points during the week, while French borrowing costs rose. On Friday, German 10-year yields were down 6 basis points at 3.456%, and French 10-year yields fell 9 basis points to 4.844%, after approaching 5% for the first time in nearly 25 years.
2. Inflation and rate expectations
Euro zone inflation accelerated to 3.8% in September from 3.2% in August, above expectations of 3.6%, driven primarily by fuel, natural gas and food costs. Core inflation rose to 2.5% from 2.4%. Traders pared back bets on ECB rate increases, with another increase no longer fully priced in until early 2027.
3. French debt under pressure
French yields rose 12 basis points over the week, and their premium over German yields reached around 140 basis points after earlier approaching 160 basis points, the highest since late 2011. High debt and political risks ahead of the 2027 presidential election have weighed on French bonds. France presented a 2027 budget bill on Thursday that seeks deficit-reducing measures, but it gave markets little relief.
