European Sovereign Debt Under Pressure as Traders Price In Rate Hikes Through 2027
European sovereign debt is under pressure as traders aggressively price in central bank rate hikes through early 2027. Germany's short-term borrowing costs reached fresh 2023 peaks on Tuesday, with policy-sensitive rates surging to new highs driven by expectations of successive interest rate increases to combat energy-driven inflation.
The relentless flattening pressure across the European yield curve comes as markets prepare for a wave of global monetary policy decisions following the European Central Bank's 25-basis-point rate increase last Thursday. Interest rate futures are discounting a 90% probability of a 25-basis-point rate hike by the Federal Reserve on Wednesday, marking its first rate increase since mid-2023.
The fundamental driver keeping short-end rate curves elevated remains the compounding energy crisis in the Middle East, which continues to pass directly into inflation expectations. Oil prices climbed another 1.2% on Tuesday to surpass $113 a barrel after Saudi Arabia blamed Iran-backed forces for a strike on its East-West pipeline that could disrupt up to 4% of global oil supply.