Euro zone bond yields diverge as investors favour safe havens

Euro zone bond yields diverged again on Monday, although ​moves were broadly less pronounced compared to the tail ​end of last week, as investors ‌favoured typical safe-haven ​assets such as German debt over more indebted countries amid mounting inflation and fiscal worries.

German 10-year bond yields were last down around 2.3 basis points at 3.4322%, ‌with the yield on the Dutch 10-year bond similarly dipping. However, the yield on Italy's 10-year bond was up 1.1 bps to 4.6335%, and the French 10-year bond yield was roughly 1.8 bps higher at 4.8832%. France and Italy are among the more ‌indebted members of the euro zone.

French government bonds have been under heavy pressureamid high debt levels and growing ‌political risks ahead of the 2027 presidential election. The selloff compounds broader concerns about elevated energy prices, rising inflation and higher interest rates that have weighed on bond markets in recent weeks. France's 10-year bond yield came close to hitting the 5% mark last week, a level last crossed in the ⁠early ​2000s. The premium of French 10-year ⁠government bond yields to safe-haven German ones hit more than 158 bps on Friday, its highest since late 2011. It was last at around ⁠145 bps.

The moves raised concerns about how severe the selloff could become and led to questions about whether the European Central Bank ​may need to step in. Shorter-dated yields, which are more sensitive to interest-rate expectations, broadly pulled back, although declines varied ⁠across countries.

German 2-year bond yields were last down 5.3 bps at 2.9964%. French 2-year bond yields were down 3.3 bps at 3.6816%, and Italy's 2-year ⁠yields ​were a touch lower at 3.5182%. Money markets last week pared back interest-rate expectations and are no longer fully pricing in another rate hike from the ECB this year. Markets are pricing in just a 22% chance of an interest-rate ⁠hike by the ECB at its next meeting in October.

Spain's Prime Minister Pedro Sanchez on Monday called a snap election ⁠for November 29 in an ⁠attempt to strengthen his mandate after a fragmented parliament rejected the government's key housing decrees last week amid widespread protests. The yield on the Spanish 10-year government bond was broadly stable, ‌last around one ‌bp lower on the day at 4.0799%.