Germany's 10-Year Bond Yield Hits 15-Year High
The yield on Germany's 10-year government bonds rose to about 3.25%, reaching around 3.27% during trading, the highest since May 2011 and a peak not seen in over 15 years. It has increased by more than 50 basis points over the past year, with about a 14 basis point rise in the last month.
The driving factors include prolonged Middle East conflicts pushing up oil and European gas prices, with oil prices previously nearing the $100 mark, leading the market to reprice for more persistent inflation. Eurozone inflation rose to 2.9% in July, significantly above the European Central Bank's 2% target. The ECB has maintained its main interest rate at 2.25%, with traders pricing in about two 25 basis point rate hikes within the year.
France's second-quarter GDP preliminary growth was 0.2% quarter-on-quarter, reversing a 0.1% decline in the first quarter; year-on-year growth slowed to 0.7%, the slowest annual expansion since the contraction in Q4 2020. Household consumption rose 0.2% quarter-on-quarter, government consumption grew by 0.4%, while fixed capital formation declined for two consecutive quarters, falling by 0.3% this quarter.
Net exports contributed about 0.6 percentage points: exports rebounded by 2.6%, while imports only increased by 0.8%. Exports of transport equipment surged by about 20%, with significant contributions from other transport equipment and aircraft chains. Inventory changes negatively impacted by about 0.6 percentage points. The French government has lowered its growth forecast for 2026 to 0.7%. The yield on France's 10-year government bonds has also risen to its highest level since 2009.
Germany's fiscal spending expansion has simultaneously boosted supply: the budget is approximately €524 billion, with nearly €180 billion supported by bond issuance for defense and infrastructure. France's unemployment rate has risen to 8.3%. The Eurozone's quarter-on-quarter growth in Q2 was 0.4%, with Spain performing better than Germany, France, and Italy.
The decline in bond prices and rise in yields are part of a global sell-off of interest rate bonds. Sellers are institutions and cross-border funds avoiding duration and inflation risks, while buying power is insufficient to offset new supply. Funds are shifting from long-term bonds to short-duration, cash, and some equities; Germany's stock market previously broke historical highs. Energy-importing countries and those with high-leverage fiscal sovereignty are under pressure, while underwriters of defense, upstream energy, and newly priced government bonds benefit. This is driven by geopolitical conflicts combined with fiscal expansion, rather than a simple growth recovery trade.
Source: Public Information
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In 2011, during the European debt crisis, Germany's 10-year bond yield also rose to the range of 3.4% to 3.5%, after which Draghi made core bonds a safe haven "at all costs." From 2019 to 2021, German bonds briefly fell into negative yields, with the central bank's balance sheet replacing private buyers. This round returns to 2011 levels, but the path is reversed: the negative interest rate era is rewritten by oil price shocks, the special defense fund, and loosening of the debt brake, transforming Germany from a "zero-supply quality asset" to a core issuer continuously issuing bonds.
Capital is shifting from duration assets to short-end and nominal growth benefiting assets that can be repriced. Germany is directing fiscal space into defense and infrastructure, while France is placing incremental demand more on public consumption and aerospace export pulses, with private investment continuously contracting. The motivation is not to stimulate the cycle, but rather geopolitical premiums forcing fiscal expansion ahead of monetary expansion: first locking in military and energy security, then financing in the market with higher term premiums. Those who can issue bonds and whose spreads are treated as the Eurozone pricing benchmark will continue to absorb global allocations.
Similar to 2011 when Italian and Spanish bonds saw the germane bund spread suddenly widen, it is also reminiscent of the discounted gilt bonds in 2022 after fiscal rules were shaken. The current Eurozone is in a phase where "core bonds lose their free insurance property, and marginal fiscal premiums are repriced," not a comprehensive expansion, but a parallel control of financing costs and transformation of military and energy structures. The export pulse of the Airbus chain can boost quarterly numbers, but cannot fill the capacity gap left by the continuous decline in France's fixed capital formation.
The essence is the transfer of pricing power. The mechanism is: energy shocks raise the inflation center, fiscal expansion increases bond supply, and the central bank no longer commits to unlimited purchases, thus the risk-free rate shifts from "policy narrative" back to "supply plus risk premium." Germany remains the anchor, but the anchor itself becomes more expensive; France's growth relies on inventory replenishment and aerospace deliveries, with fiscal credibility becoming a spread variable. When core bonds no longer subsidize the entire market duration, capital will reprice each sovereign individually.
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