By Alice Atkins

(Bloomberg) — Europe led a global bond selloff as the escalating conflict in the Middle East stoked fears of an oil supply disruption that would fan inflation.

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German yields climbed across the curve, with 10-year yields up as much as five basis points to 2.56%, the highest level in a week. Treasury yields also rose, with 10-year yields (^TNX) up as much as three basis points to 4.40%.

Traders are watching to see how Tehran responds to US strikes on Iranian nuclear facilities that pushed the Middle East into uncharted territory. Iran could retaliate by disrupting shipping in the Strait of Hormuz — a narrow artery through which a fifth of the world’s crude output flows.

“We are all oil traders this morning,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc. A rise in energy prices risks “stronger inflation for central bankers this summer,” he added, which could limit rate cuts.

Unlike the US, which is a net energy exporter, Europe is more vulnerable to swings in oil prices due to its reliance on imports. Traders pared bets on European Central Bank interest-rate cuts to price around 20 basis points by year-end, while German 10-year breakevens rose as much as four basis points. The moves came even as data showed the region’s private sector barely grew in June.

For the US, “any negative impact would be through deteriorating financial conditions or through higher for longer rates as the Fed have another reason to delay cuts,” wrote macro strategists at Deutsche Bank led by Jim Reid. In Europe “the impact is potentially more serious,” they said, noting that every $10 increase in oil prices per barrel could add a quarter of a percent to HICP within a quarter, referring to a key inflation measure.

The dollar (DX=F) gained against all Group-of-10 peers, with the Bloomberg Dollar Spot Index up as much as 0.4%.

“A further step up in the Middle East conflict is a concern here,” said Richard McGuire, head of rates strategy at Rabobank. Treasuries could “outperform on the notion that they are still the world’s risk-free rate even if US exceptionalism is already under clear threat from the Trump administration,” he added.

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