European bond yields experienced dramatic volatility as investors grappled with conflicting signals from US economic data and dovish Federal Reserve commentary, creating a perfect storm of uncertainty that sent yields soaring despite earlier dovish remarks from Treasury Secretary Scott Bessent. The unexpected surge in US producer prices has reignited inflation fears across global markets, forcing traders to rapidly reassess their monetary policy expectations and triggering widespread selling in government bonds. This market turbulence reflects the delicate balance between economic growth optimism and persistent inflationary pressures that continue to challenge central bank policymakers worldwide.
Market Response to US Economic Data
Euro zone government bond yields rose on Friday, driven by strong U.S. economic data after dropping earlier in the session on dovish remarks from Treasury Secretary Scott Bessent.
U.S. producer prices increased more than expected in July, suggesting a broader pickup in inflation in the months ahead.
In an interview on Bloomberg TV, U.S. President Donald Trump’s influential right-hand man on the economy said on Thursday there was “a good chance” the Federal Reserve lowers rates by 50 basis points (bps) when it convenes next month.
On Friday he argued that the central bank could “start with 25 (basis points) and then accelerate,” underlining he did not tell the Fed what to do.
Investors priced in around a 90% chance of a Fed rate cut next month, and a total of 124 basis points of easing by October 2026. Money market futures imply a European Central Bank depo rate at 1.9% from the current 2% at the end 2026.
“We haven’t had a major catalyst from the euro area so, more broadly, moves have been driven by the U.S.,” said Mohamad Al-Saraf, forex and fixed income research associate at Danske Bank.
“In general, moves this week have been driven by the better-than-feared U.S. inflation report and it now looks pretty much a done deal that the Fed will cut next month. The question is whether they go for 25 or 50 basis points.”
Inflation Concerns and Policy Implications
Tuesday’s U.S. inflation report was a mixed bag, with headline consumer prices rising marginally but underlying measures showing signs of building price pressures.
Germany’s two-year yield DE2YT=RR, which is sensitive to changes in monetary policy expectations, was up one bp at 1.95%. It fell 3.5 bps on Wednesday.
Germany’s 10-year government bond yield DE10YT=RR, the benchmark for the euro area, rose 3 bps to 2.70% after falling 6.5 bps on Wednesday.
Italy’s 10-year bond yield IT10YT=RR fell 3.5 bps to 3.51%, pushing the spread between Italian and German 10-year yields DE10IT10=RR to 70.2 bps, the tightest since at least 2011, according to LSEG data.
The yield gap between Italian and French 10-year yields FR10IT10=RR narrowed to about 14 bps, reflecting increasing concerns about France’s fiscal trajectory.
France unveiled a 2026 budget plan in July that included almost 44 billion euros ($51 billion) of cuts, which will probably draw resistance from Socialist lawmakers when parliament returns from recess next month.
European Bond Market Dynamics
Worries about France’s debt sustainability have been driving the narrower spread between French and Italian yields, according to Danske Bank’s Al-Saraf.
Investors were awaiting U.S. factory inflation and jobless claims data due later on Thursday, as well as the Alaska summit between Trump and Russian President Vladimir Putin on Friday.
Germany’s 30-year yield DE30YT=RR, which touched an 11-year high of 3.309% on Tuesday, was up 3 bps at 3.26%.
Euro zone bond yields surged as US producer price data reignited inflation fears, overwhelming earlier dovish Fed commentary and creating market volatility. The conflicting signals from American economic data have left investors uncertain about the pace of monetary policy changes ahead. European bond spreads continue tightening as fiscal concerns shift focus from traditional periphery risks to core eurozone nations. Markets now await crucial US employment data and the Trump-Putin summit for further direction on both monetary policy and geopolitical risk.
GCN.com/Reuters.