Eurozone bond yields edge lower but stay on course for fourth weekly gain

Eurozone government bond yields slipped on Friday, providing some relief after a week of sharp increases, though they remain on track for a fourth consecutive weekly gain. The pullback came as energy prices cooled slightly, easing some of the inflationary pressure that has gripped markets.

Germany's 10-year bond yield, the benchmark for the eurozone, was last down 2 basis points at 3.334%. Despite the daily decline, the yield is still poised for a weekly rise of 6 basis points, having touched its highest level since 2011 earlier in the week.

The recent surge in yields has been driven by concerns over persistent inflation, high levels of government borrowing, and rising energy costs. Renewed hostilities between the U.S. and Iran have heightened supply risks in the Middle East, pushing natural gas and oil prices higher for the week.

Data released on Friday showed the U.S. economy added 162,000 jobs last month, far exceeding economists' expectations of 56,000. This strong reading initially pushed U.S. Treasury yields higher, though the impact on European markets was limited.

Germany's 2-year bond yield, which is particularly sensitive to European Central Bank (ECB) rate expectations, was also down 2 basis points at 2.932%. Traders are currently pricing in 47 basis points of further ECB tightening this year, a slight decrease from earlier in the week but up from 44 basis points a week ago.

Analysts note that European markets have become increasingly sensitive to natural gas prices rather than crude oil alone, as the eurozone shifts its energy imports away from Russia and the Middle East toward Norwegian and U.S. suppliers.

In France, the spread between government bonds and German Bunds widened to 90 basis points earlier this week, its highest level since November 2024. This reflects investor anxiety over the country's upcoming budget negotiations for 2027, which are expected to be contentious. While French bonds performed well on Thursday after a successful debt auction, strategists caution that the fiscal challenges ahead could keep the pressure on.