Benchmark euro zone government bond yields hit their highest in 15 years yesterday, with oil prices heading towards their biggest three-week rise in nearly 40 years and the US military preparing to deploy thousands of extra troops to the Middle East.
A rout in global bonds gathered pace yesterday, after central bankers around the world, including those at the European Central Bank, sounded the alarm over inflation risks this week, prompting investors to swiftly price in interest-rate hikes this year.
Yields on 10-year German Bunds, which serve as a benchmark for the wider euro zone, rose as much as eight basis points to 3.035 per cent, the most since 2011, while two-year bonds, which are the most sensitive to shifts in expectations for rates and inflation, rose 10 basis points to 2.66pc.
British two-year gilt yields were up more than 20 bps, having risen by more than a percentage point since the start of the war, compared with a 65-bps rise in their German counterparts.
Money markets showed traders are attaching a near-70pc chance of a rate hike from both the ECB and the Bank of England as early as next month, with the ECB expected to raise at least once more after that and the BoE twice.
“The sad fact is there are significant upside risks to inflation and therefore the selloff makes sense. The repricing of the path of interest rates, at least in Europe, looks reasonable in light of the shock to energy prices,” Chris Scicluna, head of research at Daiwa Securities, said.
“Unfortunately expectations for two, three, four, rate hikes could yet prove conservative relative to what happens.”
Oil prices traded above $100 a barrel, set for a weekly gain of 6.5pc, bringing the gain over the last three weeks to almost 52pc, the largest three-week percentage increase since at least 1989, according to LSEG data.
On Thursday, ECB President Christine Lagarde said the euro zone was well positioned to deal with what she called “a major shock that is unfolding”.
Kirstine Kundby-Nielsen, a senior analyst for fixed income and FX research at Danske Bank, said the outlook for ECB policy was not so clear cut and April might prove too soon for a rate hike.
“From the ECB speakers out since the war began, it appears that the ECB is highly divided. Markets are struggling to find firm footing,” she said.
Within the euro zone bond market, Italian yields have risen far more quickly than those elsewhere, given Italy’s greater dependence on imported oil and gas.
Italian 10-year bond yields were up 16 bps at 3.94pc, set for their biggest one-day rise in a year.
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