Europe Bonds Extend Declines on Inflation Risk From Energy Spike

cpvq4gc5r5fpq[sp{in32zya_media_dl_1.png Bloomberg

Article content

(Bloomberg) — European bonds fell for a third session as oil and natural gas prices continued to surge, with a US plan to protect a crucial Mideast shipping lane failing to calm investor sentiment.

Article content

German and UK yields edged higher, while the debt of Europe’s so-called periphery underperformed. The premium investors demand for Italian debt over Germany, a gauge of risk, widened to 72 basis points, the most since November. 

Article content

Article content

Article content

Market attention remains firmly on the potential inflationary consequences of the energy price surge following the conflict in the Middle East. European natural gas prices are trading near the highest since 2023, while oil rose to $84 a barrel, overshadowing a US aim to escort tankers passing through the Strait of Hormuz. 

Article content

Article content

“Energy price dynamics continue to dominate bond market moves,” said Hauke Siemssen, a rates strategist at Commerzbank AG. “We would abstain from catching the falling knife today.” 

Article content

Siemssen said investors had piled into carry trades in riskier European debt markets such as Italy in recent weeks, and a dialing back of those positions is amplifying the widening in yield spreads.

Article content

While Spanish bonds also traded lower, there was no sign of impact from US President Donald Trump’s threat on Tuesday to “cut off all trade with Spain” after the country denied access to its military bases for the American bombing campaign against Iran. The gap over safer German debt widened slightly to 47 basis points, the most since December. 

Article content

The euro area — which imports almost all of its oil and most of its natural gas — is seen as being particularly vulnerable as the war in Iran escalates. The market moves are stoking fears of a rerun of 2022, when an energy price shock caused by Russia’s invasion of Ukraine proved more persistent than initially expected.

Article content

Article content

With money markets now pricing around a one in three chance of a European interest-rate hike by year-end, traders will be watching commentary from policymakers such as Luis de Guindos and Francois Villeroy de Galhau due later on Wednesday. 

Article content

“For European rates, the Ukraine episode is the key blueprint,” said Theophile Legrand, a rates strategist at Natixis SA, adding that this time however, policymakers may be less willing to look through energy-driven inflation as transitory. “Markets have not forgotten the last episode of ‘transitory’ inflation and are quicker to reprice inflation risk premia.”

Article content

—With assistance from James Hirai.

Article content