Bondholders got a fresh reminder that Europe's inflation fight is not over. Christine Lagarde warned that price risks linked to fighting in the Middle East as well as Russia's war against Ukraine have "pushed the path of energy prices up further."
Germany's 10 year yield added six basis points to 3.50%, a mark last reached in 2009. The 2 year rose by as much as 14 basis points, touching 3.21%, its loftiest level in nearly three years.
The pressure is global. Brent crude surged past $105 a barrel, while European natural gas reached its firmest marks since late 2022. In the US, 30 year Treasury yields touched highs last seen in 2007.
Lagarde said rising bond yields are "not a euro specific issue." She noted the ECB is watching the long end closely and cited several drivers, including a rise in AI-debt issuance.
After Lagarde's comments, traders leaned harder into the idea of more tightening. By the middle of next year, interest-rate swaps imply three more quarter-point increases are fully priced, and indicate the probability of a move next month is above 70%. Money markets are also pricing a further three quarter-point increases by the end of 2027.
Lagarde additionally cautioned that elevated energy costs will likely pass through over time into core and food inflation.
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The selloff pushed the extra yield on French 10 year bonds over Germany's to 91 basis points on an intraday basis, the widest since 2012. Investors' mounting concerns about the budget gap and a murkier political outlook have kept French borrowing costs under pressure.
UK government bonds fell too. Two year gilt yields rose 16 basis points to 4.86%, while the 30 year hit 5.93%, a level not seen since 1998. Derivatives positioning now implies an additional 110 basis points of Bank of England hikes by the close of next year, versus 89 basis points on Wednesday.
"Energy, and natural gas in particular, has been the only game in town for euro rates since July," said Kenneth Broux, a strategist at Societe Generale SA. He added that, compared with longer-term inflation expectations, bund yields appear elevated, and that any rebound is likely to be brief unless energy prices cool.
"Policymakers made clear that an energy-led inflation risk is still very much in play."
According to Ed Hutchings of Aviva Investors, who oversees rates, there are still openings in European bonds; however, he said, "With two hikes already being delivered and more than a further two hikes priced, things may well have gone too far."
Why it matters for your money: Rising yields mean cheaper bond prices now and higher income later, but the swings get bigger. If energy stays hot and the ECB delivers those potential hikes, the chop is likely to show up most in rate sensitive holdings and in countries where deficits and politics are under the microscope.
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