EU bond markets spent the week bracing for another ECB hike as inflation jumped and French political risk refused to fade.
Eurozone headline inflation hit 4.0% in October — a three-year high, with energy up 20% — and most published research now expects a December ECB move, with money markets pricing roughly a 59% probability. Several analysts see hikes extending into 2027, which would drag Danish policy rates along one-for-one under the peg. A minority view pushed back, arguing the labor market is soft, wage growth is slowing, and further tightening risks tipping the bloc into recession.
France remained the sore spot. Research flagged the OAT-Bund spread widening back above 150bp amid street unrest and budget worries, with one tail-risk scenario sketching a path toward 7% French 10-year yields and 400bp spreads if redenomination fears get priced. Base-case views were calmer: political polarisation eventually recentring, wider levels seen as buying opportunities, though most would wait until after the election.
On relative value, the published consensus leaned toward quality — overweight Germany, the Netherlands, Greece and Spain (helped by its renewables mix), underweight Italy and France. Long-dated European paper drew the most skepticism given debt-service and defense-spending pressures.