ECB hikes rates as global bond selloff deepens on oil surge

A punishing selloff swept through global bond markets on Thursday as surging oil prices, a fresh European Central Bank rate hike, and deepening geopolitical tensions forced a broad repricing of sovereign debt from London to Ottawa.

The ECB raised its key interest rate by 25 basis points to 2.5% — its second hike since the Iran war began in February — as widely expected. ECB President Christine Lagarde warned that the escalating Middle East conflict and the Russia-Ukraine war have "further pushed up the trajectory of energy prices," with rising energy costs potentially feeding into core inflation and food prices. In a press conference in Berlin, Lagarde also pointed to AI-related investment as a driver of rising bond yields globally, saying "any AI-related activity at the moment is a potential consumer of financing".moomoo+2

UK Bonds Under Acute Pressure

The UK gilt market bore the brunt of the selling. Two-year gilt yields rose 14 basis points to 4.84%, while the 30-year yield climbed to 5.92% — its highest since 1998. UK yields are rising faster than those in the U.S. or Europe, reflecting what analysts describe as a specific risk premium attached to British debt.fxstreet+1

The implications for Chancellor Healey's fiscal plans are severe. With 30-year yields approaching 6%, fiscal headroom has eroded to an estimated £8 billion to £9 billion from £23.6 billion in last year's budget, according to FXStreet analysis. If yields continue climbing, that headroom could be wiped out entirely, potentially forcing an emergency budget just weeks before the scheduled October fiscal statement.fxstreet

Energy Shock Ripples Across Markets

Brent crude surged roughly 4% to above $105 per barrel on Thursday after reports that Houthi forces seized a key Red Sea port in Yemen, compounding disruptions already caused by U.S. and Iranian tanker missile strikes in the Strait of Hormuz. European natural gas prices hit their highest levels since late 2022.reuters+2

The energy shock reverberated across the continent. German two-year yields jumped as much as 12 basis points to 3.19%, a near three-year high, while the spread between French and German 10-year bonds widened to 91 basis points — the highest intraday level since 2012 — as investors demanded greater compensation for France's fiscal and political risks. Canada's 10-year yield rose to 3.904%, well above the Bank of Canada's 3.50% median year-end forecast.moomoo+1

In the U.S., the 10-year Treasury yield touched 4.87%, its highest since November 2023, ahead of Friday's consumer price data and next week's Federal Reserve meeting. Wall Street opened lower, with the S&P 500 dropping and the Nasdaq Composite falling nearly 1%. Interest rate swap markets have now priced in three additional ECB hikes before mid-2026, with better than even odds of another move as soon as next month.schaeffersresearch+2

"Another rate hike before year-end is no longer a low-probability risk," said Patrick Ernst, macro investment strategist at JPMorgan ↗ 2.27% Private Bank. "Policymakers have made it clear that energy-driven inflation risks remain very real".moomoo