After the wave of selling, it is difficult to find vitality! European bonds are deeply trapped in the selling quagmire, and high yields are feared to become a long-term ghost.

According to market participants, European bonds will be difficult to rebound from the trough caused by the intense selling triggered by the Middle East war, even if the conflict can be resolved quickly. Despite intermittent rebounds in the bond market due to optimism about possible easing of hostilities, the sector remains highly volatile. On Thursday, sovereign debt in various European countries fell again, with little progress in cooling tensions and concerns in the market about a potential ground invasion by US forces. While strategists believe that this selling, especially in short-term bonds, has been excessive, they warn that yields may stabilize at higher levels compared to before the outbreak of war on February 28. Lawrence Mutkin, Head of Rates Strategy for Europe, the Middle East, and Africa at BMO Capital Markets, said, "There are many reasons to expect bond yields to remain in a higher range from now on and may test upside potential again." BMO stated that German and British government bond yields are "not particularly cheap." He pointed out a series of factors: high and rising inflation and government debt accumulation; yields still below historical average levels; and the threat that the positive spread might collapse if central banks raise interest rates and push up repo rates. The spread refers to the difference between yield income and the cost of financing positions through the repo market. Mutkin said, "The market consensus is that bonds are inevitably cheap at current levels, but we find very compelling reasons to refute this view." Germany's 10-year government bond yield, considered a safe haven benchmark in the region, is currently trading above 3%, rising by about 40 basis points this month. Yields on 2-year bonds, which closely track rate expectations, have surged even higher, rising nearly 70 basis points to 2.67%. The volatility in the UK government bond market is even more pronounced. European bonds have been hit particularly hard, as the region relies on energy imports, leading to soaring oil and gas prices that will drive up inflation. Even as the economy begins to slow, this weakens the attractiveness of holding bonds. Investors are preparing for the possibility of oil prices remaining high after the war ends. BlackRock CEO Rob Kapito stated this week that due to interrupted supply chains taking time to return to full capacity, oil prices could still rise to $150 per barrel even if the conflict ends quickly. This is also a risk that the CEO of Candriam, Nicolas Forest, is aware of. Forest stated in an interview, "We will continue to see oil price risk premiums pressuring the inflation dynamics, which is a major risk for the bond market." The company has reduced its duration, or interest rate risk exposure, as a result. Jamie Searle, a strategist at Citigroup, agrees with some of these concerns, stating that "downside risks are increasing." In addition to inflation prospects, investors may start demanding higher premiums to compensate for fiscal risks, as well as the cost of protecting the economy from energy shocks and increased borrowing for defense spending. The US bank has raised its year-end forecast for UK 10-year government bond yields from 4.15% to 4.5%. On Thursday, the trading price of these bonds was slightly above 4.90%. Searle wrote in a report to clients, "This reflects a view that the selling may be overdone, but a strong rebound is now less likely, especially given the lingering fiscal and political uncertainty in the market, as well as the duration and scale of inflation shocks."