Key Takeaways:
European sovereign yields extended their August surge into September as markets priced a second ECB rate hike by year-end, pushing Germany's 10-year Bund yield to 3.344% — its highest since 2011 and within striking distance of the 3.505% peak set in the second quarter of that year.
The five-day rally of 14.3 basis points has pulled the entire eurozone curve higher, with French, Italian, Spanish and Greek 10-year yields all climbing in tandem on Tuesday. The move reflects a market that has abandoned its assumption that the ECB would pause after a September hike, and now assigns roughly an 80 percent probability to a second increase by December.
"With inflation still accelerating, the ECB is almost certain to raise rates at next week's meeting," said Leo Barincou, senior economist at Oxford Economics. "The question is no longer whether they hike, but how far they go."
Eurostat's flash data released Tuesday morning showed eurozone inflation reached 3.3 percent in August, up from 2.9 percent in July and well above the ECB's 2 percent target, with energy prices 14.3 percent higher than a year earlier. That print, combined with rising Brent crude after US strikes on an Iranian island in the Strait of Hormuz, has forced traders to reprice the deposit rate to around 2.7 percent by December — implying a second hike following the expected 25-basis-point move at next week's governing council meeting.
The German 2-year yield rose 2.6 basis points to 2.963 percent, its fifth straight daily gain and a cumulative 15.2 basis points over the period, while the 30-year Bund yield added 0.5 basis point to 3.817 percent after touching 3.844 percent. The 2/10 spread compressed 0.7 basis point to +37.743 basis points, a sign that front-end rates are being repriced faster than the long end as markets front-load tightening expectations.
The repricing is not confined to Germany. France's 10-year OAT yield rose 3.1 basis points to 4.207 percent, its highest since November 2008, while Italy's equivalent yield climbed 2.1 basis points to 4.172 percent. Spain's 10-year yield added 2.0 basis points to 3.795 percent and Greece's rose 2.0 basis points to 4.026 percent.
French borrowing costs have now exceeded Italy's for most of the summer, a reversal that analysts attribute to fiscal rather than monetary factors. The IMF projects France's gross government debt will reach 118.4 percent of GDP this year and 120.5 percent by 2027, the third-highest ratio in the EU behind Greece and Italy. The Banque de France forecasts a budget deficit of 5.2 percent of GDP this year, with difficult negotiations ahead of the 2027 presidential election casting doubt on the government's ability to reverse the trajectory.
"France possesses the most unsustainable fiscal outlook in the euro area, and its borrowing costs should reflect that reality," said Robert Timper, chief fixed-income strategist at BCA. "Returning to a sustainable fiscal path would require substantial reforms that would be unpopular because they would reduce welfare spending."
The ECB's Transmission Protection Instrument — designed to buy government bonds to stem an "unwarranted, disorderly" rise in borrowing costs — remains available to countries that comply with EU budget rules, but analysts note France's fiscal trajectory complicates any appeal.
The European move is part of a broader global repricing. The 10-year US Treasury yield traded around 4.78 percent on Tuesday, its highest since January 2025, after Fed Chair Kevin Warsh warned at Jackson Hole that inflation "has not slowed meaningfully" and the Fed still has "work to do." Traders now price roughly a 60 to 70 percent probability of a September US rate hike.
Japan's 10-year government bond yield hit 3.00 percent for the first time since 1996, while Britain's 30-year borrowing costs sit at 30-year highs. The US debt pile has crossed $40 trillion, and debt as a share of economic output is at or above 100 percent across the G7 bar Germany.
The last time German 10-year yields traded at these levels was in 2011, during the eurozone debt crisis — a period that preceded a sharp widening of periphery spreads and, eventually, the ECB's outright monetary transactions program. Whether the current repricing proves as durable depends on whether the ECB delivers the second hike markets now expect, and whether energy-driven inflation pressures abate. The governing council meets next week, with most investors anticipating the first 25-basis-point increase.
This article is for informational purposes only and does not constitute investment advice.
