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The relief in European bonds on Friday morning is small and follows one of the sharpest bond routs in years.
The yield on France’s 10-year OAT was trading around 4.67% on Friday morning, down from around 4.7% earlier, while the yield on Germany’s 10-year Bund was around 3.59%, down from 3.61%.
The gap between French and German 10-year borrowing costs, the clearest gauge of the risk premium investors attach to Paris, blew past 110 basis points this week, its widest since the 2012 eurozone debt crisis.
The move reflects investors’ concerns about France’s debt and election risks, which were further amplified by ratings agency Scope’s downgrade of France. Investors are also weighing the risk of a 2027 presidential run-off between the far right and the far left. The cost of insuring French debt against default has also climbed to its highest in nearly a decade.
However, the bigger story was in the US.
The 30-year Treasury yield climbed to its highest level since 2004 this week, touching around 5.5%, as a fresh jump in oil prices compounded worries over persistent inflation and swelling government debt.
The 10-year Treasury yield, which anchors US mortgage rates, reached levels last seen in 2007.
US homebuyers are feeling the wider rise in borrowing costs: the average 30-year mortgage rate hit 7% this week, roughly a percentage point above where it stood before the Iran war began, and reached its highest level since US President Donald Trump took office in January 2025.
Why bonds and stocks fall together
The unusual part is that bonds have stopped acting as a safe haven precisely when stocks have wobbled.
“Bonds and stocks are falling due to inflation,” said Nick Saunders, CEO of online investment platform Webull UK.
Energy shocks and war have pushed prices higher while growth has slowed, and normally falling stocks would send investors into bonds. This time, with interest rates not falling, “the traditional safe haven” is less appealing.
Saunders pointed to the early 1970s, when a similar combination of energy shocks and wage pressure sent UK gilt yields soaring while stocks fell 73%, though he noted that today’s economies are far less oil-intensive and labour markets have more slack to absorb creeping inflation.
Inflation-linked bonds, gold and other assets decoupled from stocks offer some shelter, Saunders said, though “it would be wrong to abandon bonds entirely.”
Oxford Economics takes a calmer view of the broader move.
“We see the interest rate spike as mostly temporary, largely reflecting a repricing of monetary policy responses to surging energy prices,” said lead economists Ricardo Amaro and Daniel Kral. They added that most government budgets can absorb higher rates given the long average maturity of their debt.
However, France and, to a lesser extent, Italy are exceptions. In a severe scenario, both would “need to tighten fiscal policy by over one percentage point of GDP to offset sustained rises in interest costs,” the economists said. Spain, Greece and Portugal are better placed to withstand the pressure.