European stock markets closed lower on Friday as renewed conflict in the Middle East pushed oil prices and government bond yields higher, rattling investor sentiment over the inflation outlook. The pan-European Stoxx 600 Index ended the session down 0.2%, having earlier fallen by as much as 0.8% during intraday trading. Healthcare and banking shares outperformed the broader market, while retail and construction sectors led the declines.

In the bond market, the yield on the 30-year US Treasury climbed back to levels not seen since Treasury Secretary Scott Bessent expanded a bond buyback programme aimed at curbing long-term borrowing costs. In a separate interview, US Commerce Secretary Howard Lutnick expressed confidence that the bond market would stabilise and help drive yields lower. "The market is worried about the fiscal deficit, debt levels and inflation - all of which are pushing bond yields higher," noted Patrik Lang, chief investment strategist at Global Gate Asset Management. "I don't foresee a sharp correction, but given that equities are trading near record highs, some consolidation would not be surprising."

The recent rally in European equities has lost momentum over the past few weeks. While the Stoxx 600 Index sits only about 2% below its all-time closing high set last month, its year-to-date performance continues to lag behind both US and Asian markets.