By Alun John

Euro zone longer-dated bond yields were set for a weekly rise on Friday, their first since early June, as traders refined their positions after the initial move lower in yields on the U.S.-Iran deal.

Germany's 10-year bond yield was up 2 basis points at 2.92%. It has been moving slowly but steadily higher throughout the past week, and is set for a weekly gain of nearly 8 bps. (DE10YT=RR)

It has been driven higher by moves elsewhere, with worries about increased spending in Japan causing longer-dated yields there to rise sharply, while the 10-year U.S. Treasury yield was up 11 bps.

The euro zone benchmark is still meaningfully below its mid-May peak of 3.20%, but this week's moves show traders are moving past their initial reaction to the U.S. and Iranian deal that reopened the Strait of Hormuz, sent the price of oil down to near $70 a barrel and caused markets to remove bets on a third European Central Bank rate hike this year.

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 bonds were moving in a similar manner to longer-dated ones on Friday, with Germany's 2-year yield up 3 bps at 2.52%. (DE2YT=RR)

It was little changed on the week, however, causing the gap between Germany's 2- and 10-year yields to reach 40 bps, around the biggest since early June. (DE2DE10=RR)

In market parlance, that widening gap means the yield curve is steepening, and analysts are watching some key technical levels to see if this can continue.

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.

EYES ON FRANCE

Other euro zone bonds were largely moving in line with German benchmarks on Friday. Italy's 10-year yield was 1 bp higher at 3.71% and France's up 2 bps at 3.72%. (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.