We looked at this chart below back in July, when the 10-year Italian government bond yield was trading under 4%. Today it traded 4.25%.
As you can see it's tracking (white) step-for-step with the rise in European natural gas prices (orange). That's because sustained high energy prices feed inflation and higher interest-rate expectations across Europe. And for Europe's heavily indebted governments (like Italy), higher rates ultimately become a fiscal problem.
This dynamic drives the doom loop for Europe that we've discussed over the past six months. Expensive energy drives European inflation. Inflation forces the ECB to hike. Hikes drive up the borrowing costs of Europe's most indebted governments.
The natural gas price in Europe is a bond market problem.
With that, the ECB meets on the 10th. A rate hike is priced at a virtual certainty, with another by December. And ECB officials are publicly affirming it.
But a rate hike isn't going to unlock energy supply for Europe that has been stalled, destroyed or regulated away.
It's only going to destroy demand in an economy that's barely growing as it is.
Now compare the G20 in Asheville this week. Treasury Secretary Scott Bessent flew with Fed Chairman Kevin Warsh to North Carolina. And then he opened the Summit with prepared remarks alongside Warsh.
In an interview that morning, on bonds, Bessent said "of course we're on the same page." On rates, he said, "traditionally, you don't raise into a supply shock."
