On Thursday, government bond prices across Europe plummeted sharply. Investors panicked over Italy's budget deficit, which exceeded expectations, and growing concerns that central banks across nations might maintain high interest rates for an extended period.
At one point, the yield on Italy's 10-year bond surged by 17 basis points to 4.96%, a near eleven-year high, before settling at 4.88%. This comes after Italian Prime Minister Giorgia Meloni's administration raised its fiscal deficit target and lowered growth forecasts for the next two years.
The benchmark 10-year German bond yield, a key indicator for the Eurozone, rose by 14 basis points to 2.98%, nearing 3% for the first time in twelve years. Spain's 10-year bond yield surpassed 4% for the first time since 2013. The risk sentiment, measured by the Italy-German bond yield spread, widened to 200 basis points, its broadest in six months and the highest since the banking crisis in the U.S. in March.
The UK's 10-year bond yield also jumped by 20 basis points to 4.57%, marking its largest single-day increase since February, before ending at 4.48%.
Investors noted that concerns about the U.S. Federal Reserve maintaining "higher interest rates for a longer period" are now spilling over to European markets. The U.S. 10-year bond yield also briefly rose above 4.6% on Thursday.
Analysts believe that the recent shock in the bond market was triggered by oil prices, which hit a 10-month high on Thursday, leading investors to wonder, "What if inflation doesn't fade?"
It's not just Italy that might increase its borrowing. On Wednesday, the French government faced criticism from its financial regulatory body, which stated that France's efforts to cut public spending were insufficient to prevent a breach of EU fiscal rules next year.
On Thursday, France's 10-year bond yield soared to over 3.5%, its highest level since 2011.
Piet Haines Christiansen, Head of Fixed Income Research at Danske Bank, commented that the bond market is caught in a "perfect storm."
He further added that the notion of "higher interest rates for a longer duration" caught investors off guard. Coupled with the upward revision of budget deficits in France and Italy, as well as rising oil prices leading to heightened inflation expectations, these factors fueled the recent sell-off.
