Energy inflation casts a shadow over Europe as the logic of bond market risk aversion fails, triggering a collective surge in yields

Golden Ten Data reported on March 5 that the stabilization of the European bond market lasted only one day. As the Iran war shows no signs of slowing and energy prices continue to soar, government bonds in the eurozone and the UK resumed their decline on Thursday after a punishing start to March. German government bonds, regarded as the region's preferred safe-haven asset, are heading for their worst-performing week in a year. Although global government bonds have generally plummeted this week, Europe's high dependence on energy imports makes it particularly sensitive to conflicts erupting in the Middle East. This leaves the region highly vulnerable to a resurgence in inflation. David Zahn, Head of European Fixed Income at Franklin Templeton, said: "We believe inflation in Europe could be higher." While he does not see an imminent rate hike, the process "may be brought forward." Due to the region's vulnerability, the euro is also under pressure—a dynamic that previously caused the currency to fall below parity with the dollar in 2022. This week, the yield on Germany's 10-year government bonds has risen by 15 basis points, while the yield on UK bonds of the same maturity has increased by 25 basis points.