Global Market: Eurozone bond yields surge as energy prices fuel rate hike bets

Eurozone government bond yields rose sharply again on Thursday as higher energy prices reinforced expectations of tighter monetary policy, while investors continued to sell debt of heavily indebted countries such as France and Italy, widening their risk premiums, Reuters reported.

The renewed selling came amid a global bond market rout driven by growing expectations of central bank rate hikes and concerns over elevated government debt burdens. Yields have climbed to multi-decade highs across several euro zone markets.

Read more: Global Market Today: Asian stocks drop on inflation concerns, oil gains

France has been at the centre of the selloff as the government struggles to contain a budget deficit of more than 5% of gross domestic product. The deterioration in investor sentiment has pushed the premium demanded to hold French debt over German bonds to levels last seen during the euro zone debt crisis.

France's 10-year bond yield rose 6 basis points to 4.931% on Thursday, approaching the 24-year high of 4.994% reached last Friday. The spread between French and German 10-year yields widened 4 basis points to 142 basis points. It had climbed to nearly 160 basis points last week, its highest level since 2012.

Germany's benchmark 10-year bond yield rose 2 basis points to 3.504%. German government bonds have benefited from their safe-haven status during this week's market turbulence, with yields rising much less than those of several other euro zone countries.

According to Reuters, the latest pressure on bond markets was triggered in part by another rise in energy prices amid concerns over disruptions to Middle East supplies. Brent crude rose about 3% to $103 a barrel, near its highest level in a week, as geopolitical tensions involving Iran, Israel, Saudi Arabia and Yemen added to concerns over energy supplies.

Read more: Global Market Today: Asian stocks drop on inflation concerns, oil gains

The rise in oil prices has intensified worries that inflation could remain elevated, potentially limiting the scope for central banks to ease monetary policy or increasing the likelihood of further rate increases.

US Treasury yields also added to the pressure on global fixed-income markets. The 10-year US Treasury yield rose 5 basis points to 5.331% on Thursday, after reaching its highest level since 2002 on Wednesday. It later eased following strong demand at a 10-year Treasury auction.

Investors are also watching signals from the European Central Bank for clues on the path of interest rates. ECB chief economist Philip Lane is scheduled to speak later on Thursday, while Bank of France head Emmanuel Moulin said on Wednesday that France does not currently require support from the ECB.

Shorter-dated euro zone bond yields also moved higher as traders reassessed the outlook for ECB policy. Germany's two-year yield, which is particularly sensitive to interest-rate expectations, rose 2 basis points to 3.056%.

The move followed a decline in German two-year yields on Wednesday, when the broader bond selloff raised concerns about economic growth and prompted investors to scale back expectations for further ECB rate hikes.

The widening gap between French and German borrowing costs highlights the growing differentiation within euro zone bond markets, as investors increasingly focus on fiscal sustainability, inflation risks and the potential impact of higher-for-longer interest rates.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)
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