French government bonds experienced a sharp selloff across all maturities as persistent political uncertainty in the country continues to fuel concerns over its fiscal deficit. The downturn pushed the yield premium on 10-year French debt over comparable German bunds up by 8 basis points to 105 basis points, marking the widest spread since 2012. At the end of August, that gap had stood at 85 basis points.

The German yield curve turned bear-flattened as traders ramped up bets on European Central Bank rate hikes. Rising natural gas prices and renewed uncertainty over Middle East oil supply helped Brent crude recover its earlier losses, adding to inflationary pressures. Swaps markets now point to 16 basis points of tightening expected next month, with cumulative hikes of 39 basis points projected by year-end. Looking further out, traders anticipate as much as 94 basis points of rate increases by October 2027.

The UK yield curve also bear-flattened, driven by climbing energy costs. However, after the Bank of England announced Thursday that it would halt all long-duration bond sales, the longer end of the curve continued to attract relatively stronger support. Money markets remain priced for a 23-basis-point rate hike by the BoE in November, but bets on further tightening next year have intensified, with swaps implying cumulative increases of 111 basis points by the end of 2027.

Market snapshot: German 10-year bund yields rose 5 basis points to 3.53%, while bund futures dropped 47 ticks to 120.33. Italy's 10-year yield climbed 11 basis points to 4.44%, and France's 10-year yield surged 13 basis points to 4.58%. Across the Channel, the 10-year UK gilt yield advanced 8 basis points to 5.30%.