‘All bets are off': European borrowing costs hit 15-year highs as investors brace for rate hikes

• German 10-year bund yields rose to 3.12%, French OAT yields climbed similarly to 2011 highs, and U.K. 10-year gilt yields jumped to 5.07%, adding 83 basis points over one month
• Markets are pricing in over 90% probability of an ECB rate hike by June, with Spanish inflation already hitting 3.3% annually as the Strait of Hormuz blockade drives energy prices higher
• Deutsche Bank revised euro zone inflation forecast for March to 2.58% from 1.89%, while analysts warn yields will peak only when energy prices stabilize, with 'all bets off' if the crisis worsens

European Borrowing Costs Hit 15-Year Highs Amid Iran War Tensions

Key Developments:

European government bond yields surged to multi-decade highs as investors brace for rising inflation and potential rate hikes driven by the U.S.-Iran conflict that began in late February.

Critical Data Points:

• German 10-year bund yields hit 3.12%, highest since mid-2011 during the euro crisis
• French 10-year OAT yields reached 2011 highs, adding 14 basis points Thursday
• UK 10-year gilt yields climbed to 5.07%, up 83 basis points over the past month—highest since the 2008 financial crisis
• Spanish inflation reached 3.3% annually (below 3.7% forecast)
• Markets pricing in over 90% probability of ECB rate hikes by June

Market Drivers:

The Iran war and subsequent Strait of Hormuz blockade have sent energy prices soaring, disrupting European inflation forecasts. Eurozone inflation had fallen below the ECB's 2% target before the conflict but is now accelerating. Deutsche Bank revised March inflation forecasts to 2.58% from 1.89%.

Policy Implications:

ECB President Christine Lagarde signaled readiness to raise rates even if inflation spikes prove temporary, calling market expectations of swift recovery "overly optimistic." She warned energy supply disruptions could last years, not months.

Affected Markets:

Bond sell-offs extended across Spain, Italy, Portugal, Greece, Poland, Netherlands, and Belgium. Consumer confidence surveys in Germany and the UK showed deteriorating sentiment amid inflation fears.

Outlook:

Analysts suggest yields will peak when energy prices stabilize. Current prices indicate a scenario between ECB's "baseline" and "adverse" forecasts, supporting at least two rate hikes. The Fed is expected to hold rates steady in April (93.8% probability).