Euro zone bond yields were mixed again on Wednesday, with bond yields in highly indebted countries rising more quickly than those in safe haven countries, as financial concerns persist in France and oil prices come back into focus.
The 10-year German government bond yield rose 1.6 basis points to 3.4969 percent, according to Reuters.
The Italian 10-year government bond yield rose about 9 basis points to 4.6261 percent, after falling by more than 10 basis points on Tuesday, while the French 10-year bond yield rose 9.7 basis points to 4.8437 percent, after falling by more than 11 basis points in the previous session.
Bond markets have witnessed high levels of volatility recently, with a sharp contrast recorded at times between safe havens, such as German bonds, and highly indebted countries, such as Italy and France. Rising energy prices, inflation and interest rate concerns have put pressure on bonds globally, while high debt levels have added to these pressures in some cases.
France is at the forefront of the countries affected by these pressures, as concerns about its difficult financial situation, ahead of the presidential elections scheduled for 2027, are still keeping investors in a state of anticipation.
This pushed the spread between German and French 10-year bond yields - a measure of the premium demanded by investors for lending to France rather than Germany as the reference market - to exceed 158 basis points on Friday, its highest level since late 2011. Since then, the spread has narrowed again, but it widened during today’s trading to about 134 basis points.
Commerzbank's interest rate strategist, Eric Lim, said that he is still cautious towards French bonds compared to their German counterparts, noting that "fundamental conditions have not improved much."
Brent crude futures returned to exceed $100 per barrel.
The recent movements in the bond market also prompted traders to lower their expectations about raising interest rates by the European Central Bank. Pricing expectations for interest rate hikes rose on Wednesday, with about two hikes priced in by the March meeting, but remained below previous expectations.
The two-year German government bond yield, which is most sensitive to interest rate expectations, was largely flat on the day at 3.0751 percent. The Italian two-year bond yield rose 7.7 basis points to 3.34982 percent.
Britain's 10-year borrowing costs rose sharply on Wednesday, driven by higher oil prices and US Treasury yields, reaching their highest levels since hitting a nearly 20-year high on October 1.
The 10-year British government bond yield reached 5.44 percent at 07:12 GMT, rising 6 basis points during the day, but it is still below the peak level of 5.51 percent, which was recorded last week and was the highest in 19 years, according to Reuters.
Benchmark 10-year US Treasury bond yields rose 4 basis points to 5.31 percent, while oil prices rose 65 cents during the day to just over $101 a barrel.
The British bond move came the day after Finance Minister John Healey met with economists working for primary dealers in government bonds, also known as government bond market makers, to gauge market sentiment ahead of its first budget on October 28.
The British Ministry of Finance said in a statement on Wednesday: “He stressed the importance of financial credibility in light of a difficult global economic environment, reaffirming the government’s commitment to financial rules and its focus on achieving economic stability, growth and jobs.”
Economists at Bank of America expected on Tuesday that Haley's budget would lead to an increase in government borrowing by 15 billion pounds ($19.9 billion) in both the current fiscal year and the 2027-2028 fiscal year, and to reduce the margin of maneuver to achieve long-term budget goals.
The British Debt Management Office is scheduled to hold auctions for government bonds maturing in January 2028 and July later on Wednesday.
