European bond yields at 15-year highs amid inflation, rate hike fears

European government bonds continued their sell-off on Friday, reinforcing a trajectory in which many countries’ borrowing costs have reached multi-decade highs in recent weeks.

Germany’s return was seen on Thursday 10 year package – a benchmark for the euro zone – rose to the highest level since mid-2011, at the height of the euro crisis. On Friday morning, the 10-year bond added another 6 basis points to trade at 3.1228%, remaining above a 15-year high.

Bond yields and prices move in opposite directions, with one basis point equaling 0.01%.

Yields on French government bonds, known as OATs, also continued to rise on Friday as the country’s stocks lost value. 10 years The bond rose 9 basis points to its highest level since 2011. The previous day, the 10-year OAT rose by approximately 14 basis points.

Last week the UK government borrowing costs British bond yields have soared, reaching their highest levels since the 2008 financial crisis, as investors turn to pricing in the face of a resurgence in inflation and bet on the Bank of England’s more hawkish policies.

Benchmark 10-year UK government bond yields rose a further 10 basis points to 5.07% on Friday and are up 83 basis points last month.

Sharp sales followed the speech of European Central Bank president Christine Lagarde, who said that the ECB was ready to raise interest rates even if the inflation increases caused by the US-Iran war were short-lived.

They were also accompanied by sharp movements in bonds issued by other euro zone economies, including Spain, Italy, Portugal, Greece, Poland, the Netherlands and Belgium.

In an interview published the same day in The Economist, Lagarde labeled market views on a rapid recovery from the Iran war as “overly optimistic” and told the publication there was “no way” the Gulf’s lost energy supplies could be restored within months. He warned that the outage could last for years.

Before the Iran conflict broke out in late February, the euro zone’s inflation rate had fallen below the central bank’s 2% target. However, in February this rate increased to 1.9 percent.

The war and the subsequent blockade of the Strait of Hormuz, a key shipping route, caused global oil and gas prices to soar and disrupted European inflation forecasts. The continent is dependent on energy imports and is still reeling from the energy shock caused by the Russia-Ukraine war and sanctions on Russian exports.

Markets are currently pricing in an over 90% chance that the ECB will raise interest rates by June.

On Friday, Spain released flash inflation data, the first inflation data to come out of the euro zone since the US-Iran war began in late February.

Data showed that the annual inflation rate reached 3.3 percent; This was below the 3.7 percent expected by economists polled by Reuters.

But there are some signs that the war is starting to affect economic activity across the continent. This week’s GfK survey showed German consumer confidence has taken a hit, with respondents expecting a hit to their incomes due to rising inflation fears. In a related survey for the UK published on Friday, analysts said expectations of sharp price rises had sparked a “wave of fear” among British consumers.

“Fear of stagflationary shock is increasing” [have] “This has weighed on bond markets, with some big moves, particularly for European government bonds,” Deutsche Bank’s Jim Reid wrote in a note Friday morning.

He added that in light of the ongoing conflict, Deutsche Bank’s European economists updated their inflation forecast for March to 2.58% from the previous forecast of 1.89%.

James Bilson, global unconstrained fixed income strategist at Schroders, told CNBC that energy prices are “still by far” the most important driver of movement in European bond markets.

“Looking for a peak in yields is like catching a falling knife; it’s hard to escape the simple conclusion that yields will peak when energy prices peak,” he said via email Friday.

“The ECB identified three scenarios in its forecasts last week: ‘basic’, ‘negative’ and ‘severe’. At current prices we are between the baseline and the downside, but moving towards ‘negative’. We see this being consistent with ECB rate hikes at least a few times. If energy prices push us towards the ‘severe’ scenario, all bets are off.”

Arend Kapteyn, global head of economic and strategy research at UBS, told CNBC’s “Squawk Box Europe” on Friday that movements in the bond market reflect a “bear flattening” in which shorter-dated bond yields have risen markedly.

“If we get into a recession, then we’re going to see a big bull run again, [where] “If you say oil is at $130 and your landing zone is, say, $100, then I really think 10-year yields are going to be stuck at three or just above three,” he said. [percent]. “But in a scenario where the Fed potentially starts to cut, those bond yields could go all the way down.”

Money markets are currently pricing in a 93.8% chance that the US Federal Reserve will keep interest rates steady at its next meeting in April, according to CME’s FedWatch tool.