Euro zone yields set for seventh straight weekly rise, French spread widens

By Stefano Rebaudo

Sept 25 (Reuters) - Euro zone government bond yields were on track for their seventh consecutive weekly rise as higher energy prices and increasingly hawkish signals from central banks pushed up expectations for policy rates.

Oil prices fell slightly on Friday as markets weighed the possibility of a truce between the US and Iran against the bombing of Saudi Arabia by Houthi fighters in Yemen, and were set to end the week up 1.3%.

Euro area benchmark Bund yields were down 3.5 basis points (bps) after reaching 3.6114% on Thursday, their highest level since June 2009, while being set for a 5.5-bp weekly rise.

German 2-year yield , more sensitive to policy rate expectations, was 2 bps lower at 3.27%, after hitting 3.3269% the day before, its highest level since September 2023.

French and Italian bonds diverged this week, with French debt remaining under pressure while Italian government bonds staged a modest recovery.

Investors ramped up bets on policy rate hikes, raising borrowing costs and prompting questions about debt affordability in the euro area's more heavily indebted economies.

Money markets priced the European Central Bank’s deposit rate at 2.86% by December , implying one quarter-point rate hike and a slightly less than 50% chance of a second move. They also saw the policy rate at 3.46% by late 2027, compared with 2.50% currently.

The gap between French and German government bond yields – market gauge of the risk premium investors demand to hold French debt – was on track for a fourth straight weekly rise, widening by 4 bps after hitting 114.06 bps, its highest level since June 2012. It was at 106.50 on Friday.

The Italian spread was set for a slight weekly tightening after hitting 99.90, the widest since March 2026. It was last at 91.50.