Euro Government Bonds Drop Amid Rising ECB Rate Hike Expectations on Energy Shock

Euro-denominated government bonds declined across the board on Monday, with the German 10-year Bund yield climbing to 2.47%—up 11 basis points from Friday—reflecting heightened expectations of an ECB rate increase. The French OAT 10-year yield also rose, reaching 2.68%, while the broader eurozone sovereign bond index dropped 0.9% in early trading. The shift followed a 14% spike in European natural gas futures over the past week, fueling concerns of persistent inflationary pressure. Energy prices, tracked by the U.S. crude futures contract (CL=F), rose to $89.60 per barrel, amplifying inflation risks across the region. The market’s focus now centers on ECB policy signals. With core inflation in the eurozone hovering near 3.2% and energy costs contributing significantly to headline inflation, traders are increasingly betting on a 25-basis-point rate hike at the ECB’s upcoming March meeting. The implied probability of a rate hike has risen to 78%, up from 52% at the start of the month. This shift reflects growing conviction that the ECB may need to tighten monetary policy to preserve price stability, even as growth momentum in the region remains fragile. The repricing in bond markets has ripple effects across asset classes. The EURUSD exchange rate strengthened to 1.0985, reflecting improved carry appeal. Meanwhile, European equity indices, particularly utilities and energy firms, saw mixed performance as higher yields weigh on valuation multiples. The energy sector, however, benefited from the price surge, with European hydrocarbon producers posting gains on stronger margins. Market participants now await the ECB's next policy statement and the accompanying press conference for further clarity. The outcome could determine whether the central bank maintains a cautious stance or accelerates its tightening cycle in response to energy volatility.