German 30-year yields rose to 3.455% after rising more than 10 basis points (bps) last week, the biggest weekly increase since August. Bond yields move inversely with prices.
The German 10-year yield, the benchmark for the euro zone, rose to 2.833%, the highest level since March.
BUDGET CONCERNS REMAIN
The longer-dated part of the eurozone curve has sold off over the past week as weakness in the Japanese bond market has spread across the bloc, pushing 10-year yields above 2.8% for the first time in almost nine months.
Japanese yields have risen to multi-year peaks on expectations that the Bank of Japan will raise rates at its meeting next week, and as new Prime Minister Sanae Takaichi has pledged to spend big to keep the economy growing.
The situation remains fragile due to Japan’s heavy debt burden. The debt ratio is by far the highest of all developed countries.
Europe also has its own budget pressures. France is struggling to pass a 2026 budget, although lawmakers in the lower house on Friday approved the tax portion of social security financing for next year, helping French bonds perform better.“Even more performance potential could be on the horizon if the full social security law is passed on Tuesday and thanks to the latest increase in (Prime Minister Sebastien) Lecornu’s growth forecast to 0.8% for this year,” said Commerzbank interest rate strategist Hauke Siemssen.
The French 10-year yield rose by 1.5 bp to 3.547%, with the difference between the French and German 10-year yields little changed at 73.5 bp.
STRONG DATA
Bonds were further pressured by stronger data on Monday, leaving expectations for more ECB rate cuts in 2026 in doubt.
German industrial production rose more than expected in October, the latest in a series of data suggesting that the ECB may leave interest rates unchanged for the time being. Consumer prices rose more than expected on an annual basis and business activity rose to a 2.5-year high, data showed last week.
The ECB’s Schnabel told Bloomberg on Monday that risks to growth and inflation were tilted to the upside, although she does not expect a rate hike in the near future.
Money market traders expect the ECB to leave interest rates unchanged until 2026.
“Our base case for the ECB is unchanged until the end of 2026,” said Jefferies economist Mohit Kumar. “But we think a rate cut is more likely than a rate increase.”
The German two-year interest rate, which is sensitive to changes in interest rate expectations, rose by 2.7 basis points to 2.126%.
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