Germany’s 10-year Bund yield climbed back above 3.6%, nearing its highest level since June 2009, as the escalating energy shock reinforced expectations of additional ECB rate hikes through 2027. French bond yields likewise surged to a new 18-year high after posting their largest quarterly increase in nearly 40 years, ahead of the government’s upcoming budget announcement.
Anticipation of higher ECB policy rates is driving borrowing costs higher across the euro area and stoking concerns about debt sustainability in the bloc’s most heavily indebted member states. Political uncertainty in the run-up to the 2027 elections is further clouding their fiscal outlooks.
Oil prices advanced as investors weighed increased energy flows from the Middle East against the unresolved standoff between the US and Iran, keeping inflation risks firmly in view. Money markets now imply an ECB deposit rate of around 2.8% by December, suggesting one additional 25-basis-point increase and a 24% probability of a second hike. Markets also expect the policy rate to rise to roughly 3.4% by late 2027.
