Euro zone yields dip but head for fourth weekly rise on inflation fears

Euro zone bond yields fell slightly on Friday but headed for ​a fourth straight weekly increase as rising energy ​prices and resilient growth put pressure on central ‌banks ​to raise interest rates.

Germany's 10-year bond yield was last down 2 basis points (bps) at 3.334% as energy prices cooled. Yields move inversely to prices. However, the benchmark euro zone yield ‌was set for a weekly rise of 6 bps after this week hitting its highest level since 2011 as concerns about inflation and high government borrowing drove a global bond selloff.

Data on Friday indicated the U.S. economy had added 162,000 jobs last month, ‌smashing economists' predictions of a 56,000 increase. U.S. Treasury yields jumped after the data, although the spillover into European markets was ‌muted.

Germany's 2-year bond yield, which is sensitive to European Central Bank rate expectations, was last down 2 bps at 2.932%. Investors also watched natural gas and oil prices, which were headed for a weekly gain, as renewed U.S.-Iran hostilities heightened Middle East supply risks.

Bond yields around the world hit multi-year ⁠highs earlier this ​week after energy prices rose ⁠on renewed strikes between the U.S. and Iran, and amid concerns about high levels of government borrowing. Yields fell back on Thursday and steadied on ⁠Friday as energy prices dipped slightly.

Traders were last pricing in 47 bps of further ECB monetary tightening this year, down from above 50 ​bps on Wednesday but up from 44 bps a week ago. Economists think the ECB will likely raise interest ⁠rates on September 10 for the second and final time in what would be its shortest hiking campaign in 15 years, according to a Reuters poll.

Analysts said ⁠markets ​have been becoming more sensitive to European gas than to crude alone as the euro zone has been shifting away from Russian and Middle Eastern supply and favoured Norwegian and U.S. alternatives. The spread between French government bonds and Bunds ⁠was at 85 bps after reaching 90 bps earlier this week, its widest since November 2024, as investors worried about a ⁠perilous annual budget battle in ⁠the coming months.

"OATs (French debt) performed well on Thursday after supply was absorbed reasonably well," Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said. "However, with the 2027 budget negotiations around the corner, we still think ‌OATs are not ‌out of the woods," she added.

(reporting by Stefano Rebaudo and ​Harry Robertson; editing by Alexandra Hudson)