European bond markets witnessed a bear flattening trend, with widening yield spreads, as traders increased their bets on monetary policy tightening in response to surging energy prices. UK government bonds led the decline, following a more hawkish-than-expected stance from the Bank of England, which pushed yields higher. In contrast, the European Central Bank's communication appeared more balanced relative to market expectations.

European Central Bank President Christine Lagarde stated that, after holding rates unchanged for the sixth consecutive meeting, the ECB is fully prepared to address the escalating risks stemming from the Iran conflict.

According to informed sources, policymakers are prepared to raise interest rates as early as the next meeting if the spillover effects of the Iran conflict drive inflation significantly above target.

Year-end rate pricing indicates that the market now anticipates monetary policy tightening of 71 basis points, up from approximately 50 basis points on Wednesday.

The Bank of England's warning that it is "ready to take action" to counter inflation prompted a sharp rise in short-term UK gilt yields.

The 2-year yield recorded its largest increase since 2022, leading to a significant flattening of the yield curve.

Year-end rate pricing shows the market expects monetary policy tightening of 71 basis points, a substantial increase from 22 basis points the previous day.

Market Movements: The yield on the German 10-year government bond rose by 1 basis point to 2.95%, while the German bond futures contract fell by 5.00 points to 126.05%. The yield on the Italian 10-year government bond increased by 4 basis points to 3.77%, widening the spread between Italian and German bonds by 3 basis points to 82 basis points. The yield on the French 10-year government bond climbed by 3 basis points to 3.64%. The yield on the UK 10-year government bond surged by 10 basis points to 4.84%.