Gas prices in Europe have hit a three-year high. This is putting pressure on bonds

Natural gas futures in Europe have risen to a three-year high, while global oil contracts are heading toward $100 per barrel, according to Bloomberg. This is beginning to cause concern among European policymakers and investors alike: against the backdrop of rising energy prices, the sell-off in bonds continues. Bond yields are hitting two- to three-decade highs.

The price of natural gas in Europe has risen 11% since the start of this week, according to Bloomberg. In evening trading on September 2, October futures in the Netherlands gained 1.8%, slowing slightly after rising 3% to their highest level this year. Brent crude oil contracts rose 1% to $95.6 per barrel. At their intraday high, they traded above $97, marking a nearly 7% increase since the start of the week.

Energy prices are rising amid renewed hostilities in the U.S.-Iran conflict, fueling fears of rising inflation, according to Bloomberg. Europe is already facing low natural gas reserves ahead of winter: storage facilities are currently 65% full—the lowest level since at least 2009, the agency noted. At the same time, difficulties with oil refining—including those caused by Ukrainian drone attacks on refineries in Russia—are limiting the supply of petroleum products, the agency reports. Although many observers focus on the price of crude oil, it is the global shortage of refined petroleum products, such as gasoline and diesel fuel, that is becoming a critical problem, Bloomberg added.

“I think oil prices are becoming less and less relevant. We need to look at gasoline and diesel, and diesel prices right now are as if oil were trading at $140,” said Thomas Pugh, senior economist at RSM UK (as quoted by Bloomberg).

The rise in energy prices has pushed yields on global government bonds to their highest level since the 2008 global financial crisis, according to Bloomberg. In addition, the agency believes that high government spending in countries such as Japan, the United Kingdom, and the United States is to blame.

The yield on 10-year U.K. bonds rose by 7 basis points on Wednesday, September 2, reaching 5.29%—the highest level since August 2007—though it subsequently fell slightly, Bloomberg reported. Similar German bonds rose by five basis points to 3.39%, a level not seen since 2011. Yields on French and Italian bonds also rose, the agency reported. For Japanese 10-year bonds, the yield exceeded 3% for the first time in 30 years. Bond yields rise when their prices fall—and vice versa.

Rising energy prices are strengthening traders' bets on interest rate hikes, which in turn is pushing up yields on short-term bonds, said Michael Metcalf, head of macro strategy at State Street, in a statement to Reuters.

"High energy prices have become more relevant to the inflation forecast," said Florence Schmidt, senior energy strategist at Rabobank (as quoted by Bloomberg).

In addition, the government bond market is under pressure from aggressive bond offerings by tech giants, which are raising funds to build data centers for artificial intelligence and competing with governments for investor capital, Reuters notes. The willingness of hyperscalers (the largest providers of computing power) to pay higher rates is driving up yields worldwide, noted Naka Matsuzawa, senior macro strategist at Nomura Securities, in a report by the agency. Yields may continue to rise as investors demand a higher premium, added Saxo investment strategist Charu Chanana.

Sovereign bond yields serve as a benchmark for asset prices in financial markets, and a higher cost of money means higher mortgage rates for consumers and more difficult decisions regarding budget spending due to the increased cost of servicing debt, Reuters explained.

This article was AI-translated and verified by a human editor