The market prices in two more rate hikes by the ECB and Bank of England this year! German bond yields hit a 15-year high, UK bond yields approach an 18-year high

German government bond yields have reached their highest levels since 2011, putting pressure on the global bond market. Meanwhile, although the European Central Bank (ECB) opted to stand pat, markets have begun to price in additional rate hikes this year.

The price of Brent crude oil broke through $100 per barrel during ECB President Lagarde's press conference, fueling rising inflation expectations. The 10-year German bund yield rose as much as 4 basis points in a single day to 3.21%, while traders have now fully priced in two ECB rate hikes this year.

The UK bond market has also been dragged down by the recent surge in oil prices, with 10-year gilt yields standing at 5.09%, approaching an 18-year high set in May. Traders are now betting the Bank of England will raise rates twice more to 4.25% by the end of this year, and hike again to 4.5% by mid-next year.

Lagarde stated that there is currently no sign of "second-round effects" in inflation, but made it clear she is leaving room for another rate hike in September. This stance reinforced the market’s sense of uncertainty around ECB policy paths, further depressing European bond prices.

Escalating tensions in the Middle East, causing shocks to energy supplies, are driving up government bond yields globally. Europe’s heavy reliance on oil and gas imports means volatile energy prices are complicating the eurozone inflation outlook and putting simultaneous pressure on both bond and equity markets.

This time the ECB kept its benchmark rate unchanged at 2.25%, but the market interpreted this pause as leaving room for policy flexibility, rather than the end of the tightening cycle.

Madison Faller, Global Investment Strategist at JPMorgan, commented: "Today’s ECB pause is best understood as keeping their foot hovering above the brake. Leaving options open should not be mistaken for complacency."

In Germany, defense and infrastructure investment plans amounting to hundreds of billions of euros are being rapidly advanced, with large-scale bond issuance providing ongoing upward support for yields.

Some analysts believe that if such spending accelerates economic growth in Germany and neighboring countries, it would further underscore the ECB’s need to tighten policy.

Despite the persistent rise in yields, some investors are beginning to argue that the correction in European bonds has exceeded what fundamentals warrant.

Ed Hutchings, head of fixed income at Aviva Investors, said: "Value is emerging in European bonds, and adding to positions is starting to look attractive, although some caution is warranted in the short term."

Niall Scanlon, portfolio manager at Mediolanum, candidly admitted that the sharp rise in energy prices disrupted his original positioning. "We overweighted the front end based on ECB expectations, and that clearly hasn’t worked," he said. "Oil and gas prices have moved sharply, and we have to respect that trend."

Scanlon also pointed out that the market is likely overestimating the scale of further ECB rate hikes.

Bloomberg macro strategist Skylar Montgomery Koning noted that European and UK interest rates have essentially returned to trading closely in line with crude oil prices.

She emphasized that front-end yields are relatively sticky when oil prices pull back, with less price movement compared to May’s rally. But if oil prices keep rising, the signal transmitted by this correlation is clear—higher crude prices will once again become a common headwind for both bond and equity markets.

The US market is not immune either. Longer-dated US Treasury yields have remained above 5% for over a week, marking the longest streak since 2007. The Federal Reserve will hold its rate decision meeting next week.