Euro-area sovereign yields moved sharply higher across tenors on Thursday, extending a multi-market sell-off after flash purchasing managers' surveys showed a pickup in business activity on both sides of the Atlantic. The reaction in fixed-income markets reflected concern that stronger-than-expected economic momentum will keep central banks' policy stances tighter for longer.
Germany's 10-year Bund, the benchmark security for the single-currency bloc, climbed to 3.549% on the day. The rise builds directly on Wednesday's market action, when the note registered its largest single-day yield jump in more than two months.
At the short end of the curve, Germany's two-year Schatz yield advanced to 3.303%, reaching its highest level since September 2023. That followed a substantial one-day gain in the prior session, the largest in nearly two weeks.
Economic surveys spark rate repricing
Flash Purchasing Managers' Index (PMI) readings indicated that business activity across the euro zone accelerated at the fastest pace in over three years, a result that ran counter to forecasts of a stagflationary slowdown. At the same time, parallel PMI measures in the United States pointed to continued momentum in both services and manufacturing.
The unexpectedly firm readings prompted market participants to rapidly pare back the probability of near-term rate reductions. Rather than reassuring fixed-income investors, the data strengthened expectations that the European Central Bank may need to deliver additional rate increases or sustain a restrictive stance for an extended period.
Rates desks have increasingly priced in the prospect that policymakers in Frankfurt will keep policy restrictive well into next year to prevent energy-driven input costs from becoming embedded in core inflation.
Transatlantic spillovers and French fiscal pressures
The upward move in European yields mirrored pressure on U.S. Treasuries, where rising expectations of another Federal Reserve increase have battered prices. Futures markets were cited as assigning around a 70% probability to a Fed rate hike in October, contributing to the broader sell-off in sovereign debt.
Meanwhile, investors continued to demand a higher risk premium for French 10-year OATs as Paris confronted a fractious budget debate and worsening debt-to-GDP projections. The cost of insuring French sovereign debt via credit default swaps remained close to multi-year highs.
As a result, the French-German yield spread widened, underscoring a preference among investors for the deep liquidity of German Bunds even as core European yields pushed toward multi-month peaks.
Market implications
- Bond markets experienced broad-based selling as investors re-evaluated the path of interest rates in light of stronger activity data.
- Money markets rapidly reduced the likelihood of near-term rate cuts, increasing the odds of additional tightening from major central banks.
- Heightened demand for safe, liquid German sovereign debt contrasted with wider spreads on French debt amid fiscal and debt concerns.
For fixed-income investors and policy watchers, the combination of hotter-than-expected PMIs and persistent fiscal risks in parts of the euro area has translated into higher yields and renewed debate over the appropriate horizon for restrictive monetary settings.