From a global macro perspective, the fluctuations in the Euro bond market on April 7 are part of a broader reshaping of the global nominal interest rate curve driven by energy geopolitics, rather than an isolated incident. With the U.S. deadline on Iran approaching, unresolved risks in the Strait of Hormuz, and Brent crude rising to approximately $111.28 per barrel, Europe, which heavily depends on imported energy, faces renewed exposure to imported inflation. According to the intraday data provided by Reuters/Refinitiv, Germany's 10-year yield rose to 3.0131%, the 2-year to 2.6546%, and Italy's 10-year to 3.8964%, indicating that the market is reflecting an "extended oil price shock" across the eurozone's risk-free rates and credit spreads.
Inflation and Growth
The eurozone is currently grappling with a dual pressure. The composite PMI for March fell to 50.7, marking the first decline in demand in eight months, and the services sector nearly stalled. Meanwhile, inflation in the eurozone rose to 2.5%, again exceeding the ECB's 2% target. This indicates that while growth is slowing, prices are rising, preventing the bond market from following the traditional risk-aversion bull market. Reuters also noted that financial markets now expect eurozone inflation to approach 4% in the coming year before gradually returning to target.
Cross-Asset Implications
There is a uniform direction in cross-asset pricing: oil prices are up, the dollar remains strong, and global long-term yields are fluctuating at high levels. On April 7, the euro traded around 1.1535 against the dollar, with the dollar index near recent highs. European stocks appear resilient on the surface, benefiting the banking and energy sectors while the tech sector is under pressure, reflecting a high-inflation and higher discount rate environment rather than a full recovery in risk appetite. For European bonds, as long as oil prices remain above $110, the BTP-Bund spread, German bond term spread, and euro exchange rate will continue to fluctuate around the same macro theme.
Policy Constraints
The constraints facing the ECB are more complex than in 2022. On one hand, key rates are already at 2%, a higher starting point than before; on the other hand, Lagarde and several officials have made it clear they will not easily overlook second-round inflation effects. If the oil price shock persists, the threshold for hiking rates in June is not high. However, if growth continues to deteriorate, the central bank must avoid mistaking supply shocks for overall demand overheating. Thus, the European bond market is truly trading on the policy tolerance: should the Iran situation escalate or energy facilities be damaged, market pricing may swiftly move from "more than two rate hikes" to a more hawkish path; conversely, if risks cool down, yields may have the opportunity to fall back.
