Renewed spikes in energy prices have intensified market concerns over inflation, prompting traders to increase their wagers on interest rate hikes from the European Central Bank and the Bank of England.
Money markets now fully price in a cumulative 100 basis points of tightening from the ECB over the next 12 months, equivalent to four quarter-point moves, while expectations for the BOE point to five increases of the same magnitude.
The shift toward a more hawkish policy outlook has triggered a selloff in government bonds, with Germany's two-year yield climbing 13 basis points to 3.32% and the UK's two-year yield jumping 16 basis points to 4.97%.
Investors are increasingly worried about the impact of rising energy costs on inflation and anticipate that policymakers will adopt a more aggressive stance to combat price pressures. On Monday, natural gas prices advanced more than 5%, while Brent crude surged past $109 per barrel following the shutdown of a Saudi oil pipeline.
"The bar for further rate increases is low," said Reinout De Bock, a strategist at UBS.
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