European bonds post worst weekly drop since March
Energy price spikes drive yields to their highest levels since early March, forcing central banks to tighten policy.
G7 two-year bond yields rose by 20 basis points this week. This is the largest weekly increase since the start of the Iran war in late February. European government debt prices suffered their worst weekly performance since March.
Energy prices have surged due to conflict in the Middle East. Traders are pricing in higher inflation and more aggressive rate hikes. The European Central Bank raised rates by 25 basis points on Thursday. U.S. ten-year Treasury yields are approaching 5 percent for the first time since October 2023.
Central banks react to inflation fears
The ECB increased benchmark rates and raised its inflation forecast. It also cut its growth projection. President Christine Lagarde called the hike a no-brainer. Markets expect three more rate hikes by next March. A fourth hike is possible by June.
The Federal Reserve is also expected to lift borrowing costs next week. The Bank of Japan is widely predicted to follow suit. Investors are rushing to position portfolios for tighter monetary policy. This shift is hitting short-dated bonds particularly hard.
German and French yields hit new highs
German two-year yields rose by 23 basis points during the week. They finished Friday at 3.16 percent. German ten-year Bund yields climbed nearly 17 basis points to 3.502 percent. French two-year yields increased by 25 basis points, the most since mid-May.
French finance minister Roland Lescure said the economy will grow less than expected. The government will miss its budget deficit target. Italian two-year yields jumped 26.4 basis points, the worst performance in the G7. Italian ten-year yields stood at 4.383 percent.
Geopolitical risks drive energy costs
Attacks on tankers around the Gulf have slowed energy shipments. Producers like Saudi Arabia are starting to cut production. The Strait of Hormuz has seen a sharp drop in traffic. These factors are pushing oil prices higher and stoking inflation concerns.
GN auto markets/bonds: debt markets reports that the spillover into interest rate markets is becoming more acute. Investors are avoiding long-dated bonds due to uncertainty. Some strategists suggest waiting for benign CPI data before buying. The conflict in the Persian Gulf shows no sign of easing.
