(Bloomberg) -- A selloff in European bonds extended after European Central Bank President Christine Lagarde flagged risks to inflation, adding to investors’ ongoing concerns about elevated energy prices.
Germany’s 10-year yield rose six basis points to 3.50%, the highest since 2009. The two-year rate climbed as much as 14 basis points to 3.21%, the highest in almost three years.
Traders boosted wagers on further ECB interest-rate hikes after Lagarde flagged risks to inflation in the euro area, saying the conflict in the Middle East and developments in Russia’s war against Ukraine “pushed the path of energy prices up further.” Swaps are now fully pricing three more quarter-point increases by the middle of next year and a more than 70% chance of a move next month.
“Another hike before year-end is no longer a tail risk,” said Patrick Ernst, a macro investment strategist at JPMorgan Private Bank. “Policymakers made clear that an energy-led inflation risk is still very much in play.”
The ECB said inflation is set to remain well above its 2% target for an “extended period” as conflict in the Middle East continues to fan price pressures. Lagarde also warned that higher energy costs are set to feed through gradually to core and food-price inflation.