European bond yields are rising again, but inflation isn’t to blame

European sovereign bond yields have climbed sharply in recent days, driven by a global market sell-off sparked by rising Japanese yields, even as eurozone inflation shows little sign of accelerating.

According to flash estimates from Eurostat on Tuesday, eurozone annual inflation reached 2.2% in November, a modest uptick from 2.1% in October, and broadly in line with analysts’ expectations.

Despite the increase, month-over-month prices contracted by 0.3%, marking the first monthly decline since January and suggesting that disinflation pressures are still present.

Core inflation, which strips out volatile components such as energy and food, held steady at 2.4%, slightly below economists’ forecasts of 2.5%. Services continued to be the main driver of inflation at 3.5%, followed by food, alcohol, and tobacco at 2.5%. Energy prices, meanwhile, remained a drag, falling 0.5% compared with a 0.9% drop in October.

Among member states, Estonia posted the highest annual inflation in November at 4.7%, followed by Croatia at 4.3%. In contrast, Cyprus and France saw only marginal year-on-year increases in consumer prices, at 0.2% and 0.8% respectively.

On a monthly basis, inflation rose most in Lithuania, up 0.4%, while several countries experienced declines. Malta recorded the sharpest drop, with prices falling 3.3%, followed by the Netherlands with a 1.4% decrease.

“The headline number continues to hover close to the European Central Bank’s 2% target, but the underlying picture remains uneven,” said Professor Joe Nellis, economic adviser at MHA.

“The disinflation trend is intact but fragile, and services-led pressures remain persistent.”

Separate data on Tuesday showed the eurozone’s seasonally adjusted unemployment rate at 6.4% in October, unchanged from September and slightly above expectations.

Youth unemployment remained elevated at 14.8%.

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Among major economies, Spain led with the highest unemployment rate at 10.5%, followed by France at 7.7% and Italy at 6%, while Germany (3.8%) and the Netherlands (4%) had the lowest rates.

Compared with October 2024, the bloc’s jobless rate ticked up from 6.3%.

Despite the largely benign inflation outlook and subdued economic activity in the eurozone, bond yields have surged in recent sessions. The primary catalyst: expectations of monetary tightening in Japan.

On Monday, Japan’s 10-year government bond yield jumped to a 19-year high before stabilising around 1.86% on Tuesday. The sharp move followed hawkish comments from Bank of Japan Governor Kazuo Ueda, who said the central bank would “weigh the pros and cons” of a rate hike and act “as appropriate”.

Market pricing now implies an 80% probability of a rate increase at the BoJ’s December 19 meeting, with even higher odds for January.

Strategists at BBVA said Ueda’s remarks signalled a recalibration rather than a full policy shift, noting that “real rates would remain deeply negative” .

German 30-year bond yields rose six basis points on Monday to 3.40%, nearing highs last seen in early September, which were the strongest levels since mid-2011. Ten-year Bund yields also jumped six basis points, to 2.75%.

Francesco Pesole of ING noted that Governor Ueda’s tone was unexpectedly hawkish, adding that political opposition to rate hikes — previously assumed under new Prime Minister Sanae Takaichi — may no longer be a constraint.

“Markets were caught off guard,” Pesole said.

The upward pressure on European yields comes at a delicate time for the European Central Bank, which is widely expected to keep rates unchanged at its final meeting of the year in December. Analysts do not foresee cuts in the near term, with services inflation and weak economic growth creating a policy conundrum.

“Interest rates of 2% are already low,” said Nellis. “In the current climate, we are unlikely to see central banks in Western economies move much lower.”

While inflation appears broadly contained, spillovers from global markets — particularly Japan — could continue to drive eurozone yields in the near term, even in the absence of strong domestic triggers.