Euro Zone Bond Yields Rise Amid Upcoming Inflation Data

Euro zone government bond yields edged higher ahead of key inflation data releases from France, Spain, and the U.S. Market expectations for monetary policy shifts are heightened, with Germany's 10-year bond yield increasing by 0.5 basis points. Budget deficit concerns are also mounting in France.

Euro zone government bond yields edged higher on Friday before the release of inflation data from France, Spain, and the U.S., which could impact expectations for monetary policy on both sides of the Atlantic.

Flash inflation releases for France and Spain are due on Friday, to be followed by releases from Germany and the euro area next week. Markets are also monitoring the U.S. Personal Consumption Expenditure (PCE) figures closely.

Germany's 10-year bond yield, which serves as the benchmark for the euro zone, rose by 0.5 basis points to 2.18%. Markets now price in a 60% chance of a 25 basis-point rate cut by the European Central Bank in October, up from 20% earlier this week.

Germany's two-year bond yield, influenced by ECB rate expectations, increased by 2 basis points to 2.3%. This follows a dip to 2.079% on Thursday, its lowest level since December 2022. The spread between French and German 10-year yields—a measure of the risk premium that investors demand to hold France's government bonds—was last seen at 78 basis points, up from around 70 basis points two weeks ago. The gap reached its widest since 2012 during France's parliamentary elections, exceeding 85 basis points.

Budget Minister Laurent Saint-Martin has warned that the deficit risks topping 6% of economic output, which is significantly higher than the 5.1% estimated by the previous government in the spring. Meanwhile, Italy's 10-year yield remained flat at 3.48%, and the spread between Italian and German yields tightened to 128 basis points.

(With inputs from agencies.)