Energy Price Spikes Send European Bonds into Worst Weekly Selloff Since March

The European bond market is experiencing its worst weekly selloff since March, due to surging energy prices and central banks scrambling to combat inflation. The European Central Bank (ECB) raised euro zone rates by a quarter point on Thursday, as expected, while increasing its forecast for inflation and cutting its growth projection.

U.S. consumer inflation data is set to be released later this week, which could boost expectations that the Federal Reserve will raise interest rates when it meets next week. The Bank of Japan also meets next week and is widely expected to lift borrowing costs.

Bond yields across the Group of 7 biggest economies have risen by the most so far this week since the start of the war in late February, with two-year yields being hit particularly hard. German 2-year bond yields fell 2 basis points on Friday to 3.16 per cent, having traded around 3 bps higher earlier in the day.

ECB President Christine Lagarde described Thursday's rate hike as a 'no-brainer', and warned that the return of inflation to its 2 per cent target could be delayed even further. Money markets show traders think the ECB will raise rates three more times by next March, with a fourth hike by June.