Rising inflationary expectations, fueled by possible sanctions on Russian oil, pushed real eurozone government bond yields to a new record low on Monday amid growing fears of a stagflationary shock to the European economy, Reuters reports.

Brent oil prices soared to their highest level since 2008 after the United States and European allies weighed the possibility of a ban on Russian oil imports and a delay in the possible return of Iranian oil to world markets.

Markets are assessing the risks of a sharp rise in inflation driven by energy prices coupled with an adverse impact on economic growth; they mostly see stagflation risks, said Annalise Piazza, fixed income analyst at MFS Investment Management.

Yields on German 10-year and 30-year inflation-linked government bonds fell 16 and 16.5 basis points, respectively, to record lows of -2.513% and -2.402%, while inflation expectations rose.

A key market measure of long-term eurozone inflation expectations rose to its highest level since January 2014 at 2.309%.

Meanwhile, nominal yields on German 10-year bonds have rebounded slightly from a sharp fall last week, when they recorded their biggest drop since November 2011, as markets cut bets on monetary tightening on fears of a war in Ukraine.

In other countries, the three-month Euribor interbank rate rose to its highest level since September 2020 at -0.498%, indicating an increase in the cost of funding.

Analysts remain ambivalent about how the central bank will respond to the likely economic fallout from the conflict.

Eurozone money markets are currently pricing a rate hike of less than 25 basis points by the end of the year.

The inflation-linked yield on two-year German government bonds fell 55 basis points to a record low of -5.64%. Economists at Deutsche Bank expect the Ukrainian crisis to prevent the (European) central bank from announcing a cut in the Asset Purchase Program (APP) at this stage.

The yield on 10-year Italian government bonds rose 4.5 basis points to 1.567%, while the Italian-German bond yield spread widened to 163 basis points.

Duration measures the sensitivity of the price of a bond or other debt instrument to changes in interest rates.