Global Rates: Energy priced and UK politics drive Bunds and Gilt yields higher
At a Glance
The desk believes that rising energy prices and UK political dynamics are driving yields higher in both the Euro area and the UK. Per the full note source, the recent spike in Brent crude prices, which rose approximately 7% this week, has significantly influenced front-end rates, particularly in the UK where the beta to oil prices has been notably higher than in the Euro area. With 10-year Bund yields now above 3.1% and UK 10-year gilt yields nearing 5.15%, the desk anticipates continued volatility in these markets, especially with potential leadership challenges looming in the UK.
Key Takeaways
Full Analysis
What the desk is arguing
Energy price surges, linked to geopolitical tensions, are pushing up Bund and Gilt yields as markets reassess inflation persistence. The podcast notes that UK political events this week add a layer of uncertainty, further pressuring long-end rates. The desk implicitly rejects the notion that central banks can ignore these supply-side shocks, suggesting a more hawkish repricing ahead.
Supporting evidence includes the sharp moves in oil prices and the spillover into breakeven inflation rates. The UK's political instability amplifies the gilt selloff, creating a divergence from Bunds despite common energy drivers. The counterfactual dismissed is that rate markets have overreacted—JPMorgan believes the move is fundamentally justified.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range of 1.04 to 1.12. This view aligns with JPMorgan's assessment that energy-driven inflation will keep ECB policy tight, supporting the euro. However, the Gilt selloff could weigh on GBP, a divergence we monitor.
Specific firms: - JPMorgan: target 1.10 for Mar26 - aligned - Barclays: target 1.08 for Mar26 - aligned - Goldman Sachs: target 1.07 for Mar26 - aligned
How other firms see it
Barclays and Goldman Sachs share a broadly aligned stance, seeing the same risks from energy prices and UK politics. Their Dec-26 targets are within our range, reinforcing the consensus that rate differentials will widen in favor of the euro.
A contrary view comes from BofA, which targets 1.04 for Mar26, arguing that energy shocks will hurt eurozone growth more than the US, weakening the euro. This divergence highlights the key risk: whether central banks prioritize inflation or growth.
Market Implications
Higher Bund and Gilt yields suggest a bearish steepening in core curves, with upside risk to ECB rate expectations. EUR/USD may initially rally on hawkish ECB repricing, but persistent energy shocks could cap gains if growth fears materialize. UK Gilt underperformance relative to Bunds may persist, keeping GBP under pressure.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
MUFG | Bullish | 1.1800 |
From the original
In this podcast Francis Diamond and Aditya Chordia discuss Euro area and UK rate markets given the moves in oil prices and this week’s political events in the UK. This podcast was recorded on 15 May 2026. This communication is provided for information purposes only. Institutional
Related speeches
4 itemsRates Spark: Sentiment looking through geopolitical risks
Current market sentiment appears to be disregarding new geopolitical tensions despite higher oil prices, which contribute to elevated inflation expectations and nominal interest rates. Per the full note [source], the ongoing rise in oil prices has led to increased volatility in risk assets but has not notably spiked European bond yields. While Bunds remain stable, inflation expectations from higher oil prices could force the front end of the yield curve upward, especially if the geopolitical climate further deteriorates. Consensus forecasts for EUR/USD currently sit at 1.1700, revealing some divergences in trader expectations for the pair's trajectory.
UK assets markets starting to feel the heat
UK asset markets are under increasing pressure amid rising bond yields and heightened concerns regarding economic stability. This dynamic reflects a broader sell-off driven by investor sentiment, impacting the appeal of UK assets. Per the full note from ING, analysts highlight a distinct uptick in yields, with the 10-year Gilt yield nearing 4%, illustrating growing unease within the market. Despite an upcoming void of scheduled economic data, traders must remain vigilant as the macroeconomic backdrop evolves.