European and American interest rate trends may diverge! Citadel Securities: Energy shocks and high interest rates may exacerbate downward pressure on Europe's economy.

Title context: European and American interest rate trends may diverge! Citadel Securities: Energy shocks and high interest rates may exacerbate downward pressure on Europe's economy. Text: Citadel Securities believes that although the energy price shock and the European Central Bank's tightening of monetary policy have pushed European bond yields steadily higher, these two forces may ultimately also become factors limiting further upward movement in yields. The reason is that high energy costs and high interest rates will place greater pressure on European economic growth, and as investors pay increasing attention to the risk of an economic slowdown or even stagflation, the room for European interest rates to continue rising sharply may be constrained. Last week, as the global bond market suffered a selloff, European and UK bonds were hit particularly hard. The European Central Bank raised interest rates again, citing rising inflation risks, further boosting market expectations for subsequent tightening policy. At the same time, because Europe is highly dependent on imported energy, the energy price increase triggered by the Iran war led investors to begin betting that the European Central Bank may need to raise interest rates further to curb inflation. However, Nohshad Shah, head of fixed income sales for Europe, the Middle East and Africa at Citadel Securities, believes the market may be underestimating the negative impact of the energy shock and tighter monetary policy on European economic growth, and this growth pressure may ultimately in turn limit further rises in interest rates. Shah said: "As the consequences of tightening policy and the energy shock for economic growth increasingly become the focus of investors' attention, I am increasingly doubtful whether forward rates in the middle segment of the European yield curve can continue to rise." Divergence in the capacity of European and American economies to withstand pressure; US Treasury yields may have more room to rise Compared with Europe, Citadel Securities believes the US economy is better able to withstand high energy prices and high interest rates, so US interest rates still have more room to rise. Although rising energy costs and inflation concerns have also pushed US Treasury yields higher, the United States has a massive oil and natural gas industry and is less sensitive to rising imported energy prices than Europe. At the same time, the continued booming wave of artificial intelligence investment is providing additional support to the US economy, enabling it to withstand higher interest rates for longer. Shah said the United States is "better able than Europe to absorb high interest rates," while the stagflation risk facing Europe is more prominent. This difference in economic fundamentals may ultimately be reflected in the trajectory of European and American interest rate markets. Shah believes that as growth pressure gradually emerges, medium-term forward rates in Europe may fall relative to those in the United States. In other words, even though both European and American bonds have recently been affected by the energy shock and inflation concerns, yield trends in the two regions may gradually diverge in the future. For Europe, rising energy prices will not only push inflation higher, but also increase costs for businesses and households, weaken real purchasing power and drag down economic activity; at the same time, further interest rate hikes by the European Central Bank to control inflation will create additional pressure on demand by raising financing costs. This means the European Central Bank faces a more obvious policy dilemma: continuing to tighten policy helps curb inflation, but may further weaken economic growth. Therefore, the factors recently driving European bond yields higher may also become forces suppressing yields in the future. Once the market's focus shifts from "inflation forcing central banks to raise rates" to "high interest rates and the energy shock dragging down the economy," investors' expectations for further rate hikes in Europe may cool. The Iran war remains the biggest variable; US inflation risks cannot be ignored However, Shah also warned that the United States is not completely immune to the effects of an energy shock. As the Iran war continues, the risk brought by an oil price shock remains high. He believes that as the US midterm elections approach, Tehran may have a stronger incentive to expand the conflict, including taking action against commercial shipping and energy infrastructure in the Middle East. If the conflict escalates further and global oil and natural gas supplies face more severe disruption, energy prices may continue to rise, further intensifying US inflation pressure. Citadel Securities' view of the European and American bond markets is not that European inflation risks have faded, but that the European economy is less able to withstand an environment in which an energy shock and high interest rates exist simultaneously. The United States, by contrast, may have greater policy and growth buffer space thanks to its domestic energy industry and the economic support brought by the AI investment boom. This also means that after this round of global bond selling, European and American interest rate trends may gradually diverge: further increases in European yields may be constrained by weak economic growth and stagflation risks, while if the US economy continues to show resilience and energy prices remain high, US Treasury yields may face more persistent upward pressure.