‘All bets are off': European borrowing costs hit 15-year highs as investors brace for rate hikes

Core Viewpoint - European government bonds are experiencing a significant sell-off, with borrowing costs reaching multi-decade highs across multiple countries, driven by rising inflation expectations and potential interest rate hikes by the European Central Bank (ECB) [1][4]. Group 1: Bond Yields and Market Reactions - The yield on Germany's 10-year bund surged to 3.1228%, the highest level since mid-2011, after adding 6 basis points [2]. - French government bonds also saw an increase, with the 10-year OAT rising by 9 basis points, reaching levels not seen since 2011 [3]. - U.K. government bond yields rose to 5.07%, marking an increase of 83 basis points over the past month, following a spike in inflation expectations [4]. Group 2: Economic Context and Inflation - The euro zone's inflation rate had dipped below the ECB's 2% target before the Iran conflict, but rose to 1.9% in February, exacerbated by the war and energy supply disruptions [6]. - Spain's flash inflation data indicated an annual rate of 3.3%, lower than the 3.7% expected by economists, reflecting the ongoing economic impact of the conflict [7]. - Consumer confidence in Germany has declined, with fears of rising inflation affecting income expectations, while similar concerns are noted in the U.K. [9]. Group 3: ECB Policy and Future Projections - Markets are pricing in over a 90% chance of the ECB raising interest rates by June, influenced by the ongoing inflationary pressures [7]. - Deutsche Bank's economists have revised their inflation forecast for March to 2.58%, up from a previous estimate of 1.89%, indicating a shift in economic outlook due to the conflict [10]. - The ECB has outlined three scenarios for economic forecasts, with current conditions between the 'baseline' and 'adverse' scenarios, suggesting potential rate hikes if energy prices remain high [12].