(Financial Times Europe, Ian Smith and Sam Fleming, March 31, 2026).
Eurozone government bonds are heading for one of their worst months in the last decade, pushing financing costs for some countries to multi-year highs as investors grow nervous about the impact of the Iranian shock on the region’s public finances, with Italian 10-year borrowing costs rising to 4.14% on Friday, the highest level since mid-2024, amid a global bond sell-off driven by inflation fears over sharply rising oil and gas prices.
The yield then fell to 4.08% but was still up nearly 0.8 percentage points since the start of the month, rivaling a similar-sized sell-off during the region’s last energy crisis in 2022, and in volatile trading French 10-year yields hit an intraday high on Friday of nearly 3.9%, the highest since 2009, while Spanish yields rose close to 3.7% for the first time since late 2023.
Bonds have been hit this month as traders bet on three interest rate hikes by the European Central Bank this year to contain a forecast inflation surge, and fund managers said the rise in longer-dated yields is exacerbated by the expected hit to public finances from higher financing costs and measures to shield consumers from rising prices.
Sharp rise in borrowing costs
“Eurozone government bonds are heading for one of their worst months in the last decade, pushing financing costs for some countries to multi-year highs as investors grow nervous about the impact of the Iranian shock on the region’s public finances. Italian 10-year borrowing costs rose to 4.14% on Friday, the highest level since mid-2024.”
Inflation fears and fiscal stimulus
“Bonds have been hit this month as traders bet on three interest rate hikes by the ECB this year to contain a forecast inflation surge. Investors are betting that public finances across the Eurozone are ‘about to deteriorate’ as countries spend ‘a lot of public money’ to absorb the shock.”
National measures to soften the blow
“Spanish lawmakers have approved a €5 billion tax cut package to mitigate the impact of higher energy prices. Italy has temporarily cut fuel excise duties by 20%, a measure costing €417 million until April 7. In France, the government has introduced targeted measures for sectors such as agriculture and road transport at a cost of €70 million.”
Spread widening
“The bond sell-off has reversed what had been a multi-year rally for the ‘peripheral’ countries versus Germany. The spread between Italy and Germany has risen back to nearly 1 percentage point. Bert Colijn of ING said part of the move could reflect investors unwinding positions betting on a further narrowing of spreads.”
Risks to debt sustainability
“Some warn that a further rise in the 10-year Bund yield from its current 3.1% could push borrowing costs for other Eurozone economies into less comfortable territory. In a scenario where the Bund yield rises above 3.5% and borrowing costs for Italy and France approach 5%, ‘debt sustainability becomes uncertain.’”
(Excerpt from the newsletter by Giuseppe Liturri)
