Middle East Tensions Spark European Bond Market Selloff

European bond markets have experienced significant turmoil in recent days, driven by concerns over Middle East supply disruptions and their potential impact on inflation. This has led to a sharp increase in yields across various European bonds.

The Germany 10-year bund yield has reached a multi-decade high of 3.57%, not seen since 2009. France's 30-year yield also surged, hitting 5.1766%, its highest level since 2002. The UK 30-year gilts touched 5.94%, their highest point since 1998.

The spike in bond yields is largely attributed to the closure of Saudi Arabia's East-West Crude Oil Pipeline following attacks from Iraq, which has cut off a vital route for transporting oil through the Strait of Hormuz. This has intensified concerns over global energy supplies and prompted expectations that central banks will maintain tight monetary policy.

The European Central Bank (ECB) recently raised its three key policy rates by 25 basis points each, with President Christine Lagarde warning that 'headline inflation will remain well above the bank's 2% target for longer due to the ongoing Middle East conflict and the Russia-Ukraine war.'