Eurozone government bond yields are rising after a sharp decline, with US rates taking center stage

Euro zone government bond yields rose on Monday as investors took a breather after a sharp decline late Friday, triggered by US President Donald Trump’s threat of a “massive” hike in tariffs on Chinese imports.

Trump revived the trade war against Beijing on Friday, in retaliation against China for restricting its critical mineral exports.

German 10-year government bond yields, the bloc’s benchmark, rose one basis point (bp) to 2.64% after falling 7 basis points on Friday.
Borrowing costs in the euro area have been in limbo in recent weeks as the US government shutdown and the ECB’s well-established interest rate outlook left markets without clear direction.

Barclays noted on Friday that Bund realized volatility hit a low seen during the European Central Bank’s quantitative easing. U.S. Treasury yields fell to multi-week lows on Friday as investors fled risky assets and sought safety in government bonds. The US fixed income market is closed on Monday for Columbus Day.

“The risk from this episode is less about rates and more about policy unpredictability,” said Paul Donovan, chief economist at UBS Global Wealth Management. “The positive from this episode is that the administration appears to be responding to market movements,” he added, arguing that both Trump and US Vice President Vance have taken a more conciliatory tone this weekend. The German two-year interest rate, which was more sensitive to expectations regarding the ECB’s policy rates, remained stable at 1.95%. Traders have slowly raised their expectations for future ECB rate cuts in recent days, including late Friday after Trump said he was considering a “massive increase” in tariffs on Chinese imports.

They had priced in about a 55% chance of a 25 basis point ECB rate cut in July, compared with about 45% earlier on Friday before Trump’s comments on China tariffs, and 35% in early October. The policy rate will be 1.90% in February 2027, up from 2% at the end of September.

The yield gap between safe-haven Bunds and 10-year French government bonds – a market measure of the risk premium investors demand to hold French government bonds – was 83.50 basis points. Last week, rates reached 87.96 basis points, the highest level since January 13, amid concerns about France’s budget outlook. French Prime Minister Sebastien Lecornu faces a race against time to form a government before Monday’s budget deadline. Investors see no clear catalyst for further widening of French spreads if no new elections take place.

“Sovereign debt spreads have also normalized, and our data showed no signs of liquidation for French bonds across maturity buckets during the week,” said Bob Savage, head of markets macro strategy at BNY.