Europe bond yields spike on oil surge
European bond markets are selling off as oil soared above $115 per barrel, pushing yields on high-yield bonds to 2.5% (vs. 3.2% in the U.S.) From Europe to Asia, bond markets plunge as oil vaults above $115, High Yield bonds, spread at 3.2% in the US and 2.5% in Europe - Il Sole 24 ORE. Investors are betting on rate hikes from the ECB and Bank of England, with swaps implying a 70% chance of two 25-basis-point ECB hikes this year Traders Boost ECB, BOE Rate-Hike Bets as Energy Prices Soar | Financial Post.
The surge in oil prices is primarily driven by escalating tensions in the Middle East, particularly the US-Israel war on Iran, disrupting traffic through the Strait of Hormuz. This has revived fears of rising inflation, prompting investors to anticipate tighter monetary policies from central banks. The Bank of England is now largely expected to hold rates steady at 3.75% for the rest of 2026, a stark contrast to previous expectations of rate cuts. Some experts even foresee a potential rate increase towards the end of 2026 or into 2027, with the National Institute of Economic and Social Research (NIESR) predicting rates could rise above 4% by year-end. The European Central Bank (ECB) is also facing increased pressure to potentially hike interest rates. While the probability of a July rate hike has slightly decreased to 60% from 80% earlier in the week, traders still anticipate two rate hikes by 2026. Estonian central bank Governor Madis Muller suggested the probability of the ECB's next rate change being a hike has increased. European high-yield bonds generally offer higher credit spreads compared to their US counterparts, making them attractive to some investors. However, investors are closely monitoring the impact of rising energy prices on European economies, particularly those heavily reliant on energy imports like the UK.
