Natural gas prices pose major threat to European economy

Rising natural gas prices have surpassed oil as the primary concern for European bond traders, threatening to reignite inflation due to fuel supply shortages. European gas prices are approaching five-month highs, with winter contract costs doubling compared to last year.

This volatility coincides with 10-year government bond yields in Germany and the United Kingdom reaching levels not seen in decades. Investors fear that surging gas prices will force central banks to raise interest rates more aggressively than currently anticipated by markets.

Natural gas plays a critical role in the regional economy, accounting for approximately 21% of the energy mix in the European Union and between 25% and 35% in the United Kingdom. While current prices remain below the peaks seen at the start of the conflict in Ukraine in 2022, gas now represents the most significant energy-related risk to interest rate forecasts in Europe and Britain.