European bonds sold off across the board this week, with the driving narrative shifting from "ECB easing" to "ECB may actually hike again."
Middle East tensions and oil price spikes revived inflation concerns, and multiple research desks argued markets are now pricing a September ECB hike as more likely than not. One view flagged 10-year Bund yields holding near the 3% area, with structural pressure from heavier German borrowing, ECB balance sheet runoff, and reports of Japanese pension funds trimming foreign allocations. Longer-dated projections from one house pointed to Bunds drifting toward 3.4% by Q3 2026 and BTPs toward a similar handle.
Peripheral and semi-core spreads widened alongside the move. Italian BTP-Bund spreads were called particularly sensitive to the energy shock, while French OATs drew repeated warnings: analysts flagged fiscal slippage risk and the approach of the 2027 presidential race — with a National Rally win seen as a clear widening catalyst — as reasons the OAT-Bund premium near 80bp could stretch further.
On the credit side, published notes leaned constructive on select Italian and utility names while flagging switches out of lower-coupon long-duration paper.