Published by Global Banking & Finance Review®
Posted on April 16, 2026
4 min readLast updated: April 16, 2026
Add as preferred source on GoogleEuropean government borrowing costs are rising as bond yields surge amid the U.S.–Israel–Iran war, ramping up pressure on fragile public finances. Slower growth and expensive energy further threaten to keep yields elevated.
By Harry Robertson
LONDON, April 16 (Reuters) - European bond yields have jumped during the U.S.-Israeli war on Iran, pushing up government borrowing costs and adding to the pressure on the continent's fragile public finances, even before slower growth and fiscal support measures have an impact.
Despite a sharp rebound in stocks on hopes the war will soon end, analysts say bond yields are likely to remain elevated as damage to Gulf infrastructure keeps energy prices high.
"Clearly, that increase in yields is a negative for public finances in Europe," said Max Kitson, European rates strategist at Barclays. "It ultimately feeds through to higher interest costs."
Here are six charts highlighting why the rise in yields is painful for European governments:
Despite the ceasefire, bond yields — which move inversely to bond prices and dictate government borrowing costs — remain considerably higher than when the conflict began.
That's largely because traders have bet a rise in energy prices will force the European Central Bank and Bank of England to raise interest rates this year.
Britain sold a record sum of 10-year government bonds at the highest yield since 2008 this week, at 4.916%. France earlier this month auctioned a 10-year bond with the highest yield since 2011 at 3.73%, according to Reuters calculations.
Debt servicing costs are either high, or rising, in Europe's four biggest economies after the pandemic boom in spending and the subsequent rise in interest rates.
Britain was forecast to spend roughly 109 billion pounds ($148 billion) on net debt interest in 2026/27, compared to around 66 billion pounds on the defence budget, reflecting its large share of inflation-linked debt and higher interest rates.
French state debt-servicing costs were expected to be 59 billion euros ($70 billion) this year, with Germany's around 30 billion euros.
Even before the conflict, Italy's interest costs were expected to rise to 9% of revenue by 2028, according to S&P Global Ratings. France's were expected to climb to more than 5% as politicians struggle to agree on fiscal policy.
Government debt offices are constantly raising money via bond markets and will feel the effects of rising yields as they replace maturing debt, though Kitson and other analysts said the impact will be relatively slow.
Italy has to roll over debt worth 17% of GDP in 2026, data from S&P Global Ratings shows, compared to 12% for France and 7% for the UK and Germany.
"It's an additional headache… but not more than that," said Andrew Kenningham, chief Europe economist at Capital Economics.
"A lot will depend on what happens to energy prices, and, secondarily, to what extent governments try to shield the economy from those higher prices."
The risks to former crisis countries such as Italy, Spain and Greece have fallen as they have cut primary deficits in recent years, analysts said, with bond yields in all three below 2022 or 2023 levels during the conflict.
Britain is the most exposed major European economy to inflation-linked bonds, at around 24% of its stock of debt. Payouts on such bonds rise and fall with inflation.
That proved costly during the post-pandemic inflation surge. Britain's net debt interest jumped from 1.7% of GDP in 2019-20 to 4.4% in 2022-23, according to the Office for Budget Responsibility.
Few analysts expect a return to double-digit price growth. But the OBR estimates a 1 percentage point increase in inflation would add about 7 billion pounds to debt interest costs this year, denting finance minister Rachel Reeves' 24 billion pounds of headroom against her fiscal rules.
Developed economies have shifted towards borrowing for shorter periods, allowing them to take advantage of lower rates on shorter-term bonds.
Although this has helped limit debt interest costs, the International Monetary Fund warned on Wednesday that it also brings risks.
"When debt is concentrated at shorter maturities, governments must refinance more frequently, increasing their exposure to abrupt shifts in market conditions or investor sentiment," the Fund said in its latest fiscal monitor report.
($1 = 0.7381 pounds)
($1 = 0.8490 euros)
(Reporting by Harry Robertson; Editing by Amanda Cooper and Toby Chopra)
European bond yields have surged due to the U.S.-Israeli conflict with Iran, which pushed up energy prices and increased expectations for higher interest rates.
Higher bond yields raise government borrowing costs, increasing debt servicing expenses and putting further strain on public finances.
The UK, France, Germany, and Italy face rising debt servicing costs, with the UK and France experiencing the most significant increases.
Countries with a high proportion of inflation-linked bonds, like the UK, face greater costs when inflation rises, increasing overall debt interest.
As governments refinance maturing debt at higher yields, their overall borrowing costs rise gradually, further pressuring public budgets.
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