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