Europe's Bond Market Plunges as Natural Gas Prices Soar
Europe's government bond market is experiencing its worst selloff in years due to rising natural gas prices and geopolitical tensions.
The price of natural gas at the TTF hub has climbed past €75 per megawatt-hour, a level not seen since early 2023. This surge has led to higher bond yields across the board, with inflation expectations revised sharply upward.
Germany's 10-year Bund yield peaked at around 3.38% to 3.39%, its highest point since 2011, while UK 10-year gilts surged to around 5.1% to 5.29%. These numbers haven't appeared on a Bloomberg terminal since 2007-2008.
The selloff is hitting shorter-duration bonds particularly hard, which makes sense given their sensitivity to shifts in central bank policy expectations. Earlier this year, markets were positioned for ECB rate cuts, but now traders are pricing in rate hikes, with the odds of a March 2026 hike exceeding 60%.
The current surge shares similarities with the 2022 energy shock but has a different catalyst. Escalating tensions between the US and Iran have disrupted energy supply chains, pushing natural gas prices above previous lows.