European government bonds extended their gains as yields continued to fall, with investors still reducing bets on a prolonged monetary tightening cycle by the European Central Bank.
The yield on Germany’s 10 year bond, the Eurozone benchmark, fell to its lowest level since early April, noting that bond prices move inversely to yields.
The main support for European debt markets came from oil prices falling below $80 per barrel, alongside higher global crude supply flows. This helped ease concerns over potential supply disruptions linked to the recent geopolitical tensions in the Middle East.
The decline in oil prices also helped calm investor concerns over persistent inflationary pressures caused by higher energy costs, an important factor for Europe given its heavy dependence on energy imports from the Middle East.
At the same time, a widening gap is emerging between the U.S. and European economies. In the United States, recent economic data showed continued strength in consumer spending, core inflation holding at relatively high levels, and a resilient labor market, supporting expectations that interest rates may remain elevated for longer.
In the Eurozone, however, recent indicators point to slowing economic activity. Manufacturing PMI data showed weaker performance in heavy industries and softer industrial demand across major economies, led by Germany and France.
Although the European Central Bank raised interest rates by 25 basis points earlier to contain energy related price pressures, markets now believe the European economy may not be able to withstand a long tightening cycle.
Germany’s 2 year bond yield also fell to 2.57%, while the growing divergence between the economic paths of the United States and the Eurozone widened the gap between sovereign bond yields on both sides.
According to market data, the spread between U.S. and European 2 year bond yields reached 163 basis points, its highest level since September 2025, as investors continue to restructure their portfolios according to the different monetary policy paths of the Federal Reserve and the European Central Bank.
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