Energy Price Shock Sparks Global Bond Selloff and Inflation Fears

Global debt markets are on track for their sharpest weekly selloff since the Iran war began, as surging energy prices intensify inflation concerns and pressure central banks to tighten monetary policy.

The European Central Bank raised interest rates by 25 basis points on Thursday, in line with expectations, while lifting its inflation forecast and lowering its growth outlook. ECB President Christine Lagarde indicated that inflation could take longer than previously expected to return to the bank's 2% target.

Investors are awaiting U.S. consumer inflation data later on Friday, which could influence expectations for the Federal Reserve's policy decision next week. The Bank of Japan is also due to meet next week and is widely expected to raise borrowing costs.

Benchmark 10-year German Bund yields have risen about 17 basis points this week, while French and Italian bonds have also weakened. Money markets are pricing in three additional ECB rate increases by March, with the possibility of a fourth hike by June.