European bond yields have reached multi-year highs following the European Central Bank's (ECB) recent interest rate hike and President Christine Lagarde's hawkish comments regarding inflation risks. On September 10, 2026, the ECB raised its deposit rate from 2.25% to 2.5%, indicating that inflation could remain "well above target for an extended period." This prompted traders to increase their bets on further rate hikes, with some now expecting the deposit rate to end the year at 2.75%.
The selloff in European bonds has been exacerbated by ongoing concerns about high energy prices, partly due to the escalating conflict in the Middle East. This geopolitical tension threatens to keep inflation elevated, putting pressure on central banks to tighten monetary policy further. For example, Germany’s two-year yield rose by as much as 12 basis points to 3.19%, its highest in almost three years, on September 10. Germany’s 10-year Bund yield was around 3.5% on September 11, while the equivalent French yield was about 4.44% and Italian 10-year yields stood at approximately 4.37%.
The impact was also felt in the UK, where the 10-year gilt yield reached 5.378% on September 10, its highest level since 2007. Yields on 20- and 30-year gilts also climbed to 5.895% and 5.948%, respectively, their highest since 1998. This surge in yields across Europe reflects investors' expectations of sustained monetary tightening, making borrowing more expensive for governments and businesses alike. The market sentiment indicates that investors are bracing for new ECB rate-hike cycles well into next year, driven by persistent inflationary pressures and the ECB's tough stance.
