By Alun John

German 10-year bond yields headed for their first weekly rise in a month on Friday, as traders refined their positions after the initial move lower in yields on the U.S.-Iran deal.

Benchmark 10-year Bund yields were up 3 basis points at 2.93%, having risen for the last five days in a row, heading for a weekly increase of 8 bps. (DE10YT=RR)

They have been driven higher by moves elsewhere, with worries about increased spending in Japan causing longer-dated yields there to rise sharply as well.

The yield on the euro zone benchmark bond is still meaningfully below its mid-May peak of 3.2%.

The U.S./Iran deal that reopened the Strait of Hormuz sent the price of oil down to near $70 a barrel and caused traders to wind down bets on successive European Central Bank rate hikes this year.

Inflation is still a worry, however. The ECB raised rates in June, and money markets still see a second rate hike this year as more likely than not.

Shorter-dated, rate-sensitive bond yields have also risen this week, although by less than their longer-dated counterparts, a market dynamic known as curve steepening. German 2-year yields were up 4 bps at 2.53% (DE2YT=RR), having risen by 2 bps this week.

The discount in German 2-year yields to 10-year yields reached nearly 41 bps, the largest since early June. (DE2DE10=RR) It has grown almost 8 bps this week, marking the largest weekly increase since mid-April.

Kenneth Broux, head of corporate research FX and rates at Societe Generale, said short-dated rates were kept in check by soft European inflation data this week, while longer-dated bonds had seen some spillover from Japanese government bonds.

He said he was watching the 200-day moving average for the German 10-year yield, at 2.85%. The note did not break below that level earlier in the week, in a manner reminiscent of similar moves in March and October, limiting its scope for an imminent move lower.

However, "the sequence of lower highs since May keeps alive possibility that rates have peaked", he said.

German yields offered little reaction to a Reuters report that the German draft budget for 2027 foresees borrowing of more than €203 billion ($232 billion), up from total borrowing of €196.5 billion in the key targets approved by the government in April.

The estimate, according to the budget draft seen by Reuters on Friday, compares with €50.5 billion in 2024 under the previous government, before Germany threw off decades of fiscal conservatism last year in an effort to revive its economy.

EYES ON FRANCE

Other euro zone bonds were largely moving in line with German benchmarks on Friday. Italy's 10-year yield was 3 bps higher at 3.72% and France's up 2 bps at 3.73%. (FR10YT=RR), TVC:IT10Y

But another development this week was the widening of the gap between French and German bond yields, an indication of the greater premium investors require to lend to France rather than Germany.

This was last at 80 bps, its highest since November 2025, as investors are, once again, starting to worry about France's financial position. (DE10FR10=RR)

Morgan Stanley analysts have revised up their forecast for the French deficit to 5.2% of GDP and flagged in a note that this month could be important.

"On the usual budget process key decisions need already to be taken in July before the government prepares the draft budget bill over the summer and submits it to parliament in early October," they wrote.

The gap between French and German borrowing costs came close to 90 bps in early 2025 as the government failed to get its budget approved.