A sharp selloff in Eurozone government bonds accelerated Tuesday, pushing yields to multi-year highs as traders priced in a trio of European Central Bank interest rate hikes this year amid escalating geopolitical tensions and soaring oil prices.
"With no progress in the Middle East and rising oil prices above $100, market sentiment is downbeat," Christoph Rieger, a strategist at Commerzbank, said. The downbeat sentiment reflects a growing consensus that persistent inflation will force the ECB into a more aggressive tightening cycle.
The market's repricing was evident across the continent's debt markets. Germany’s 2-year bond yield, highly sensitive to shifts in monetary policy expectations, climbed 6.6 basis points to 2.713%. The German 10-year bund yield, a benchmark for the region, rose 6.1 basis points to 3.101%, marking its fourth consecutive day of increases. The selloff extended to peripheral bonds, with Italy's 10-year yield jumping 9.3 basis points.
The moves come as deteriorating U.S.-Iran relations push Brent crude futures toward $104 a barrel, threatening to keep inflation elevated and complicating the ECB's policy path. Markets now almost fully expect a 25-basis-point hike at the ECB's June meeting, with two more to follow by year-end. This hawkish stance marks a significant shift, increasing borrowing costs for governments and corporations and potentially slowing economic growth.
This article is for informational purposes only and does not constitute investment advice.
