Castle Hill Securities suggests that while energy shocks and tighter central bank policies have pushed European bond yields higher, these very factors could ultimately limit further yield gains by weighing on the region's economy.

After the European Central Bank raised interest rates last week citing rising inflation risks, European and UK bonds became the hardest hit in the global bond selloff. Europe's reliance on imported energy has prompted traders to price in further central bank tightening. However, Nohshad Shah, head of EMEA fixed income sales at Castle Hill Securities, notes that the potential economic hit from growth may constrain how much further rates can climb.

Rising energy costs and inflation concerns are also pushing US Treasury yields higher, but Castle Hill Securities believes American rates have more room to ascend. Shah points out that the US, with its vast oil and gas industry, is less vulnerable to energy price spikes. The AI investment boom also provides a sufficient buffer for the US economy to withstand higher interest rates for a longer period.

He adds that this divergence could ultimately show up in forward rates in the middle of the European yield curve falling below those in the US. "As investors increasingly focus on the growth impact of policy tightening and energy shocks, I am growing more skeptical that forward rates in the middle of the European yield curve can continue to march higher," Shah writes.

He argues that America's "capacity to endure high rates is far stronger than Europe's, where the stagflation risk is far more pronounced."