Citadel says weak growth could cap European bond yields

Citadel Securities expects weak European growth to limit how far bond yields can rise as tighter monetary policy and an energy shock weigh on the region’s economy.

Nohshad Shah, Citadel’s head of EMEA fixed-income sales, said Europe and the UK are more exposed to imported energy costs than the United States. The European Central Bank’s rate increase last week drove a global bond selloff as traders prepared for more hikes.

Shah said the growth consequences of tighter policy and higher energy prices could eventually push European intermediate forward rates below comparable US rates. 

He described stagflation risks as more dominant in Europe, while the US economy has greater capacity to absorb higher rates because of its domestic oil and gas industry.

The contrast is also supported by continued US investment in artificial intelligence, which Citadel says could help the economy withstand higher rates for longer.

Shah cautioned that the oil shock still presents risks for the US as the war in Iran continues. He said Tehran may have greater incentive to target commercial shipping and regional energy infrastructure ahead of the US midterm elections.