Pound falls as European bond rout deepens amid energy shock

Yesterday 17:20

By: Dakir Madiha

Pound falls as European bond rout deepens amid energy shock

European government bond markets are facing one of their most severe sell-offs in nearly a decade, driven by surging energy prices linked to the conflict involving Iran. Investors are increasingly pricing in higher interest rates, widening fiscal deficits, and renewed stagflation risks across the region.

Yields have climbed sharply across major economies. France’s 10-year bond yield rose to nearly 3.9 percent last week, its highest level since 2009. Italy’s equivalent reached 4.14 percent, a peak not seen since mid-2024, while Spain’s 10-year yield approached 3.7 percent for the first time since late 2023. Germany’s benchmark Bund, long viewed as a safe asset, surged to a 15-year high above 3.12 percent, according to CNBC.

The sell-off has been particularly intense in the United Kingdom. The 10-year gilt yield climbed to 5.07 percent on Friday after rising by about 83 basis points خلال March, marking its highest level since the 2008 financial crisis. The scale of the move wiped more than 100 billion pounds from the value of a key gilt index in a single month, according to Investing.com. Sterling weakened sharply, falling to a three-week low against the euro, with the GBP/EUR exchange rate trading near 1.1515.

Rising borrowing costs are compounding fiscal pressures. Governments already dealing with elevated spending levels now face demands to shield households from higher energy costs, increasing the risk of larger deficits and further instability in bond markets. Barclays strategists said the likelihood of more expansionary fiscal policy has increased following the energy shock, Reuters reported. Deutsche Bank pointed to growing concerns over a stagflation scenario, noting that its economists have raised inflation forecasts significantly.

The European Central Bank held its deposit rate at 2 percent during its March 19 meeting but revised its 2026 inflation forecast upward to 2.6 percent from 1.9 percent. The bank cited the short-term impact of the conflict on prices. ECB President Christine Lagarde said policymakers remain ready to raise rates even if inflation proves temporary. Markets now expect at least two rate hikes this year, with Barclays and Deutsche Bank both anticipating tightening as early as mid-year.

The United Kingdom faces heightened vulnerability due to its reliance on energy imports and its large public debt burden. This exposure makes it more sensitive to supply-driven price shocks. The Bank of England kept rates unchanged but warned that rising energy costs could influence wages and domestic pricing decisions. Investors who had expected rate cuts earlier in the year have shifted their outlook toward multiple increases.

With Brent crude trading above 112 dollars per barrel and no clear resolution to tensions in the Middle East, risks remain elevated for European sovereign debt. PGIM noted that European government bonds have become one of the most sensitive asset classes to the ongoing conflict, losing their traditional role as a safe haven during periods of market stress.