European government bond yields surged to multi-year highs on Tuesday as investors braced for prolonged inflation driven by the unresolved Iran war, pushing borrowing costs across the continent to levels not seen in over a decade.
France’s 10-year bond yield climbed to 4.10 percent, its highest level since June 2009, while Germany’s 10-year Bund yield, the eurozone benchmark, rose above 3.25 percent to reach its strongest point since March 2011. The 30-year French bond hit its highest yield since 2008, and Germany’s 30-year bond reached 3.78 percent, a 15-year high.
Sell-off spreads across Atlantic
The bond rout was global in scope. In the United States, the 30-year Treasury yield touched 5.33 percent, a level last seen in 2007. In the United Kingdom, the 30-year gilt traded at 5.85 percent, its highest since May. The sell-off intensified after hopes for a swift resolution to the Iran conflict faded, sending Brent crude to nearly $91 a barrel and reigniting fears that energy-driven inflation will force central banks to tighten policy further.
“The breakdown in US-Iran peace talks has increased the risk that energy prices remain elevated for the rest of the year, which could keep inflation higher than expected and increase the chance of central banks raising rates,” said Richard Carter, head of fixed interest research at Quilter Cheviot.
ECB rate expectations climb sharply
Investors are now pricing a 90 percent probability of a September rate hike by the European Central Bank, with the deposit rate expected to reach 2.76 percent by March 2027, up from the current 2.25 percent. The ECB had already postponed planned rate cuts in March, raising its 2026 inflation forecast and cutting growth projections as the Iran war disrupted energy supplies through the Strait of Hormuz.
Rising long-dated yields are not driven solely by rate expectations. “Investors are concerned about the scale of borrowing in major economies including the UK, France and Japan,” Carter noted, adding that significant volumes of AI-related bond issuance have added to supply pressures on the market.
Fiscal pressures mount for weakest borrowers
The jump in yields has immediate implications for government debt refinancing. Italy is expected to refinance maturing debt equivalent to 17 percent of GDP in 2026, according to S&P Global Ratings, compared with 12 percent for France and 7 percent each for Germany and the UK. Higher borrowing costs will feed gradually into budgets as governments roll over existing debt at elevated rates.
The bond market turbulence underscores Europe’s vulnerability to the ongoing Iran conflict, which has already triggered a second energy crisis on the continent. Dutch TTF gas benchmarks nearly doubled earlier this year, and the ECB has warned of potential technical recessions in Germany and Italy as the combination of high energy costs and tighter monetary policy squeezes growth.
Analysts at Goldman Sachs have raised the probability of a recession over the next 12 months to 30 percent, while Moody’s Analytics puts it at nearly 49 percent. The ECB’s governing council member Dimitar Radev has warned that inflation expectations in the euro area could accelerate, further complicating the central bank’s policy calculus.
Sources: Euronews; Trading Economics; S&P Global Ratings; Quilter Cheviot; Goldman Sachs; Moody’s Analytics
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