Key Takeaways
- The French 30-year bond yield rose to its highest level since the 2011 sovereign debt crisis while in the UK, the 30-year gilt spiked to the highest level since 1998.
- The surge in European government bond yields was triggered by political crises in France and UK, but concerns about the sustainability of public finances are global.
- But falling core inflation keeps September rate cut on the table.
European government bonds are being sold off amid fears of exploding public debt in many countries. Political and fiscal uncertainty in France and the UK are among the catalysts of the latest bond price declines, though the fallout extends across the region.
The French 30-year bond, considered a barometer of investor confidence in the long term, rose to 4.50% on Sept. 2, its highest level since the 2011 sovereign debt crisis. In the UK, the 30-year gilt moved above 5.80%, its highest level since 1998, while Chancellor Rachel Reeves is under pressure to fill a multi-billion pound hole in public finances.
Pressure on bond markets increased on Wednesday, Sept. 3, when yields on 30-year US Treasuries reached 5% for the first time since July on fears of debt growth and high inflation. The 30-year German bund rose to 3.40%, its highest level in over 10 years, and Italy’s 30-year BTP yields jumped to 4.68%.
Demand has appeared to remain healthy, at least in the case of Italy: BTPs placed on Tuesday received bids of EUR 218 billion against an offering of EUR 18 billion.
Why Are Government Bond Yields Rising?
Bond yields move in the opposite direction of bond prices, which have been under pressure due to rising fiscal uncertainty. The surge in eurozone government bond yields was triggered by political turmoil in France, where Prime Minister François Bayrou called for a vote of confidence on the 2026 budget plan, which includes about EUR 44 billion in cuts for 2026 and is facing strong opposition from the main parties.
The National Assembly vote will be held on Sept. 8, and according to Charlotte de Montpellier, an economist at ING Belgium, “the obstacle is almost impossible to overcome” and the risk is “fresh uncertainty” in an already fragile political landscape.
Bond market tensions also emerged in the UK this week when government bond yields jumped to 27-year highs, exceeding those of eurozone countries, against a backdrop of disordered public finances and a potential ouster of the Chancellor of the Exchequer.
Market concerns about the sustainability of public finances are not limited to France or the UK. According to Il Sole 24 Ore, based on data from the Global Debt Monitor as of March 31, public sector debt rose from USD 91.5 trillion to over USD 97 trillion in just a few months, with the United States playing a leading role with debt exceeding USD 37 trillion. Europe is very much part of this global trend, as the region’s governments grapple with a rising cost of borrowing and the need to increase spending on defense and infrastructure.
As a result, investors are reviewing their positions on government bonds. “We have shifted to a negative view on government bonds, particularly on bonds with longer maturities. This reflects our concerns around both inflation risks and potential repricing of ‘term premium’, or the extra yield investors require to compensate for the risk of holding longer-dated bonds,” says Patrick Brenner, chief investment officer, multi-asset, at Schroders, in a note on Sept. 2.
Schroders’ multi-asset team has also revised its position on equity markets from “positive” to “neutral,” as it believes that the risk/return profile of equities is becoming “less compelling in the near term” due to an increasingly vulnerable economic and financial environment.
Crucial Credit Ratings Are Coming Up
The selloff on the bond markets comes on the eve of a dense calendar of sovereign rating reviews in many countries. According to Bank of America, every single issuer is scheduled for a potential rating change from at least one credit rating agency from September to the end of the year 2025. But the focus is mainly on Italy and France, because the former could be upgraded, while the latter could be downgraded, according to BofA analysts.
Yields on Italian and French government bonds have almost converged since the outbreak of the political crisis in France. The spread—which is a measure of country risk—hit a low of 5.5 basis points on Aug. 27, among the lowest levels in the last twenty years, and could fall further in the coming weeks or months.
As of Sept. 3, the yield on the benchmark French 10-year bond is 3.60%, while the Italian 10-year BTP yields 3.71%, but during the previous week the spread fell below ten basis points on several occasions. The recent narrowing of the spread is attributable more to movements affecting French government bonds than to those affecting Italian ones.
“We cannot rule out that the BTP-OAT spread may continue to fall further in the coming months,” says Javier Rouillet, senior vice president of Morningstar DBRS’s Global Sovereign Rating team.
Why Is Italy Faring Better Than France?
According to Marie-Anne Allier, bond fund manager at Carmignac, political uncertainty and declining interest in French debt among foreign investors, particularly Japanese investors, are the main causes of the increase in OAT yields and the reduction in the spread relative to BTP. “Italy is suffering somewhat less because the country benefits from greater support from domestic investors than France.”
Morningstar DBRS’s Rouillet says the main factors are the divergence in fiscal performance and the different degrees of stability of the respective governments. He also expects that Italy’s fiscal deficit will continue narrowing over the next two years, supported by a stable political environment. On the other hand, the uncertain political situation in France could further complicate the implementation of budget cuts and put more pressure on its public finances.
