Energy Prices Send European Bonds Plummeting Amid Rate Hike Expectations

European bonds are on track for their worst weekly selloff since March as energy prices surge. Benchmark German 10-year bonds have seen their worst performance in nearly six months, rising almost 18 basis points this week to reach 3.5136%. This marks the largest weekly increase since early March.

Short-dated bonds are being hit hard due to investors pricing in a growing chance of rate hikes from central banks worldwide. The European Central Bank increased eurozone rates by a quarter point on Thursday, as expected, while raising its inflation forecast and cutting growth projections. Expectations for a rate hike from the Federal Reserve next week have also increased following U.S. consumer price data that showed an acceleration in August.

U.S. 10-year Treasury yields came close to touching 5% for the first time since October 2023, while German 2-year bond yields rose more than 25 basis points this week, marking their largest weekly gain since early March.