European debt market: European bond bear market easing, traders increase bets on interest rate hikes

European bond markets stabilize, spreads widen, and traders increase bets on monetary policy tightening amid soaring energy prices. UK government bonds lead the decline, as the Bank of England’s more hawkish stance than expected pushes yields higher. The European Central Bank’s statements are more balanced compared to market expectations.

ECB President Christine Lagarde stated that after maintaining interest rates for the sixth consecutive meeting, the ECB is fully prepared to address the escalating risks from the Iran conflict.

Sources say that if the spillover effects of the Iran war cause inflation to significantly exceed targets, policymakers are ready to raise interest rates as soon as the next meeting.

Year-end rate pricing indicates the market expects monetary policy to tighten by 71 basis points, up from about 50 basis points on Wednesday.

The Bank of England warned it is “ready to act” to combat inflation, which has driven short-term UK government bond yields sharply higher.

The 2-year yield saw its largest increase since 2022, and the yield curve has flattened significantly.

Year-end rate pricing shows the market expects a 71 basis point tightening, a substantial rise from 22 basis points the previous day.

Market:

Germany’s 10-year government bond yield rose 1 basis point to 2.95%, German bond futures fell 5.00 points to 126.05%.

Italy’s 10-year government bond yield increased 4 basis points to 3.77%, and the spread between Italian and German bonds widened by 3 basis points to 82 basis points.

France’s 10-year government bond yield rose 3 basis points to 3.64%.

The 10-year UK government bond yield increased 10 basis points to 4.84%.