Euro Zone Bond Yields Fall as Recovery from Gilt Sell-off Continues, Tariff Deadline Looms

Euro Zone Bond Yields Retreat Amid Gilt Rebound and Global Trade Tensions

July 4, 2025 — Euro zone bond yields eased on Thursday as markets continued to stabilize from last week's sell-off in UK gilts, with investor attention now shifting to the looming tariff deadline between the European Union and the United States. While European government debt regained its footing, market participants remain wary of potential disruptions from trade tensions and shifting monetary policy expectations.

Recovery Continues After UK Gilt Turbulence

Euro area bonds have been on a cautious recovery path following the sharp rise in UK gilt yields last week, driven by hotter-than-expected UK inflation data and renewed expectations of a rate hike by the Bank of England. However, with fresh comments from policymakers indicating a less aggressive monetary tightening approach, yields have started to normalize across Europe.

The benchmark German 10-year Bund yield fell by 4 basis points to 2.43%, continuing its decline from a recent peak of 2.53%. French 10-year OATs also dipped to 2.98%, while yields on Italian 10-year BTPs edged lower to 4.01%, narrowing the spread with German bunds—a key gauge of risk sentiment in the bloc.

"Markets have found a moment of calm after the gilt-driven turbulence," said Christoph Rieger, head of rates and credit research at Commerzbank. "There’s an expectation that the UK spike was more of a localized event, and investors are once again gravitating toward the relative safety of euro zone debt."

Eyes on Tariff Deadline as EU-US Trade Tensions Simmer

Even as the bond markets stabilize, geopolitical risks are taking center stage. The European Union faces a July 15 deadline to negotiate with the United States over potential auto tariffs, with Washington threatening a 25% levy on EU electric vehicle imports unless a compromise is reached on digital trade taxes and subsidies.

The looming deadline has injected uncertainty into risk sentiment, prompting a flight to safety into sovereign debt.

“Bond yields are falling not just due to technical recovery, but also due to a more defensive tone in markets ahead of the tariff showdown,” said Agnès Belaisch, Chief European Strategist at Barings. “Investors are factoring in a potential hit to industrial production and export sentiment in the euro area if no deal is reached.”

The euro zone’s export-heavy economies, particularly Germany, are especially vulnerable to a trade rift with the U.S., which remains a key destination for automotive and machinery exports.

ECB Messaging and Inflation Outlook in Focus

Adding to the cautious optimism in bond markets is the European Central Bank’s latest guidance. ECB President Christine Lagarde reiterated earlier this week that the bank remains committed to a data-dependent path, opening the door to further rate cuts later in the year, but only if inflation continues its downward trajectory.

Euro area headline inflation eased to 2.3% in June, down from 2.6% in May, according to Eurostat's flash estimate. Core inflation also moderated slightly to 2.7%, still above the ECB’s 2% target.

"Markets are reassessing the ECB path," said Piet Christiansen, Chief Strategist at Danske Bank. “While one more rate cut in September is largely priced in, investors are cautious about pricing in a dovish pivot too aggressively, especially with the U.S. Fed remaining relatively hawkish.”

Money markets currently imply around 40 basis points of rate cuts by the ECB by the end of 2025, down from over 60 basis points priced in earlier this year.

Investor Outlook: Safe Haven Appeal Returns

As euro zone bonds regain appeal, asset managers are slowly rotating back into sovereign debt, especially in the core markets. Demand for bunds and Dutch debt has surged, driven by institutional buying and global funds looking to hedge against equity volatility.

"The risk-reward is more favorable now than it was two weeks ago," noted Anne-Sophie Levesque, fixed-income portfolio manager at BNP Paribas AM. "Yields are still relatively high by historical standards, and with political and trade risk resurfacing, core bonds offer attractive downside protection."

Meanwhile, peripheral bonds—like those from Italy, Greece, and Spain—are expected to remain more volatile given their sensitivity to global risk-off moves and internal fiscal pressures.

With the rebound in euro zone bond markets gaining traction, investor focus has shifted to geopolitical developments and the ECB’s policy trajectory. While the near-term outlook appears more stable, the looming EU-US tariff deadline and global inflation uncertainty keep risks tilted to the downside. Investors are advised to tread cautiously, balancing yield opportunities with growing macro headwinds.