Following a week of intense volatility, European government bonds stabilized heading into the weekend, managing to outperform their U.S. counterparts. Sentiment throughout the week was largely driven by news of the U.S. government's planned expansion of its Treasury buyback program, an initiative designed to curb the sharp rise in long-end yields across the Atlantic. Simultaneously, easing energy prices and tentative signs of de-escalation in the Middle East supported a continuation of the mild "bull steepening" trend in European yield curves.
Looking at the specific market action, German bund yields were essentially flat on the day, holding at 3.26%, yet still recorded a weekly gain of 5 basis points. Meanwhile, bund futures declined by 7 ticks to settle at 123.83. In France, the 10-year OAT yield edged up 1 basis point to 4.13%, widening the spread over German bunds by a single basis point to 88 basis points. Across the Channel, the UK 10-year gilt yield was a relative outperformer, slipping 1 basis point to 5.06%.
Elsewhere in the eurozone, Italy's 10-year BTP yield rose 1 basis point to 4.08%, with the spread over bunds widening by 1 basis point to 83 basis points. Notably, long-dated European debt lagged the curve, as Germany's 30-year yield remained unchanged at 3.76%, while the French 30-year yield advanced 2 basis points to 4.92%.
Christoph Rieger, head of rates and credit research at Commerzbank, noted that market focus is now shifting toward the upcoming budget season. He highlighted that France appears likely to struggle in avoiding another fiscal deficit of around 5%, underscoring the unsustainable trajectory of its public finances.
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