FRANKFURT, Sept. 4 (Xinhua) -- Government borrowing costs across Europe have climbed to or near multi-decade highs, as persistent inflation concerns, expectations of higher interest rates and mounting worries over public debt weigh on sovereign bond markets.
These pressures, analysts warn, could keep long-term yields elevated, as fiscal strains and geopolitical risks reshape the outlook for Europe's bond markets.
A BROAD-BASED RISE
A global bond sell-off has pushed up borrowing costs across Europe amid concerns over inflation, fiscal deficits and rising public debt.
Germany's 10-year Bund yield climbed to 3.38 percent, its highest level since April 2011, while the two-year yield reached 2.99 percent, its highest since June 2024.
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 the 30-year yield reached 4.94 percent.
Poland's benchmark 10-year yield also climbed back above 6 percent after trending higher since July.
Pressure has also spread to traditionally highly rated countries such as the Netherlands. The yield on 10-year Dutch government bonds rose to approximately 3.43 percent on Tuesday, its highest level since May 2011.
The broad-based rise in yields suggests that the pressure is no longer confined to countries with traditionally high debt burdens but has spread across much of Europe's sovereign bond market, according to notes on fixed income strategy from Allianz Global Investors.
FORCES DRIVING YIELDS HIGHER
The recent surge in European government bond yields has been driven partly by a broader global bond sell-off, as renewed increases in oil prices fuel fears of sticky inflation and interest rates remaining higher for longer.
Europe is particularly exposed to such external shocks, including wars, energy disruptions and pressure on critical supplies, which can raise inflation risks and prompt investors to demand higher returns on long-term bonds, according to Christian Odendahl, European economics editor at the British magazine The Economist.
These external inflation shocks are compounding pre-existing domestic challenges.
Kiran Ganesh, managing director and global head of investment communications at UBS Global Wealth Management, said higher energy prices were adding to upward pressure on yields already driven by fiscal concerns.
European governments are also borrowing more to fund defense, the energy transition and to cover the costs of aging populations. The European Central Bank (ECB) 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.
Fiscal credibility is therefore playing a greater role in bond pricing. France's 10-year yield spread over German Bunds has widened to around 80 basis points (0.8 percent) amid doubts over its ability to rein in deficits. The Bank of France has warned that failing to reduce the deficit to 5 percent of GDP or below could increase the risk of further rating downgrades.
LONG-LASTING PRESSURES
Persistent fiscal deficits, geopolitical tensions and renewed energy shocks could keep European government bond yields elevated even after the latest sell-off subsides.
According to Michiel Tukker, rates strategist at ING, higher structural deficits combined with energy shocks from global conflicts are putting further upward pressure on real yields across Europe.
Frances Cheung, head of FX and rates strategy at OCBC, has also pointed to heightened inflation expectations as an important driver of the recent rise in European borrowing costs.
Higher bond yields could themselves become a significant constraint on the eurozone economy.
ING estimates that a 50-basis-point increase in bond yields could have a slightly greater impact on inflation and economic growth than an equivalent ECB rate hike, suggesting that financial markets are already delivering substantial monetary tightening.
Carsten Brzeski, global head of macro at ING Research, said the ECB must therefore guard against an excessive tightening of financing conditions, particularly if borrowing costs diverge sharply among member states.
At the same time, the traditional risk gap between countries such as Germany and France, long viewed as safer borrowers, and countries such as Italy and Spain, historically seen as riskier, is becoming less clear.
Massimo Spagnol, fixed-income portfolio manager at Generali Asset Management, noted that stronger growth and more stable debt management in Italy and Spain have encouraged investors to focus more closely on countries' actual fiscal and economic fundamentals rather than past perceptions of risk. ■
