Gas rationing fears hammer euro, trigger govt bond buying

Pipes at the landfall facilities of the 'Nord Stream 1' gas pipline in Lubmin (Image: Reuters)

The euro fell sharply on Tuesday and German government bonds extended their rally, as European Union countries prepared to approve emergency plans to curb gas usage in the face of the latest supply cuts from Russia.

Europe faces an increased gas squeeze from Wednesday, when Russian’s Gazprom said it would cut flows through the Nord Stream 1 pipeline to Germany to a fifth of capacity.

The supply crunch and calls for energy rationing are likely to tip the euro bloc into recession, while keeping inflation high.

"It’s becoming a more mainstream view that the price to pay for supporting Ukraine against Russia will be gas rationing,” said Rabobank senior rates strategist Lyn Graham-Taylor.

"We’ve had the gas story, gas prices are higher again, the EU is meeting and all this adds to the recession and inflation story.”

The recession fears sent euro zone government bond yields lower, as prices shot higher. Germany’s benchmark 10-year Bund yield fell eight basis points at around 0.94 percent – its lowest level in two months