Europe's Bond Rout Deepens on Gas Prices and Rising Inflation

European government bond yields have been rising rapidly in recent weeks, outpacing other major markets. The UK, France, and Italy have seen their longer-term borrowing costs increase the most among G7 countries, with yields reaching multi-year highs.

In Germany, investors are demanding the richest compensation since 2011 to hold its 30-year bonds, while 10-year bund yields have climbed by 24 basis points from August 4th, reaching around 3.35%. The comparable US Treasury has risen by 14 basis points over the same period.

The European Central Bank is expected to raise interest rates at Thursday's meeting, with futures implying three additional quarter-point rate hikes over the next year. This comes as natural gas prices have surged over 120% since the Iran war began, reaching a three-year high last week due in part to record-low storage levels.

Energy experts are warning that governments and companies may reenter the market, pushing prices above €100 per megawatt-hour, about 40% above current levels. This has led to fears of rising inflation expectations, which have lifted where investors think policy rates will sit, driving longer-dated yields higher.

Analysts are also watching closely for political developments in Europe, particularly in France and Italy. France's borrowing costs have widened versus Germany's, while Italy's have narrowed, with investors viewing Prime Minister Giorgia Meloni as bringing steadier politics and tighter fiscal discipline.