Energy price surges fuel inflation concerns, while European bond yields continue to rise.

Due to the continuous surge in oil and gas prices, European bonds fell for the third consecutive trading day, and the US plan to protect the Strait of Hormuz failed to calm investors' concerns. German and British bond yields edged higher, while the bonds of so-called "peripheral countries" in Europe performed poorly. The spread of Italian bonds relative to German bonds (a measure of risk) widened to 72 basis points, the highest level since November last year. The focus of the market remains on the potential inflation consequences of the surge in energy prices following the conflict in the Middle East. European natural gas prices are approaching their highest levels since 2023, while oil prices have risen to $84 per barrel, making the US plan to escort oil tankers through the Strait of Hormuz pale in comparison. Hauke Siemssen, interest rate strategist at Deutsche Bank, said, "The dynamics of energy prices continue to dominate the bond market. It is not advisable to take risks today." Siemssen said that in recent weeks, investors have flocked to higher-risk European debt markets such as Italy for arbitrage trades, and the reduction of these positions is exacerbating the widening of yield differentials. Although Spanish bonds also declined, US President Trump threatened to "cut off all trade with Spain" on Tuesday, after Spain refused the US to use its military base for airstrikes against Iran, but these threats did not affect the Spanish bond market. The spread between Spanish bonds and the safer German bonds slightly widened to 47 basis points, the highest level since December last year. The euro area is heavily dependent on imported oil and most of its natural gas, and with the escalation of the Iran war, the euro area is considered particularly vulnerable. Market volatility has heightened concerns that the situation in 2022 could repeat, when the energy price shock caused by the Russo-Ukrainian war lasted longer than initially expected. With the money market currently estimating a one-third likelihood of a rate hike in Europe by the end of the year, traders will closely monitor comments from policymakers such as Villeroy de Galhau and Weidmann later on Wednesday. Theophile Legrand, interest rate strategist at French Trade Bank, said, "The Ukraine event is a key reference blueprint for European interest rates," adding that this time, policymakers may not be as willing to consider energy-driven inflation as a temporary phenomenon. "The market has not forgotten the lessons of the last 'temporary' inflation and will reevaluate inflation risk premiums more quickly."