The support measures for the energy crisis will be expensive for Europe. The problem with this is that unlike the past eight years, when the European Central Bank was content to print money and buy as many bonds as needed, governments will have to find new investors.

Net issuance of European government bonds is expected to reach almost 500 billion euros in 2023, a record. This figure considers the additional financing needs if the economic downturn proves to be more severe and also considers other sources of financing outside the bond markets. The net amount could climb another 100 billion euros if the ECB starts slowing down its reinvestments, called quantitative tightening.

With inflation nearing 10%, bond investors are not in a mood to tolerate the fiscal largesse of the past and will be inclined to demand higher rates to buy European debt. Even regional powers like Germany and France will not be spared from increased borrowing costs. And it could be worst for Italy, the most financially vulnerable of the major economies in the European Union. The market could start to question the sustainability of debt in countries like Italy.

Gone are the days when you had to pay to hold German debt. Global bond markets have had an abysmal year. At the end of 2021, the German 10-year rate was -0.18%. On December 7, it was 1.79%.The ECB is one of many to turn the page on an ultra-accommodative monetary policy. The Fed launched quantitative tightening six months ago, shrinking its balance sheet by about $330 billion, while the Bank of England has been actively reselling gilts into the market.

The question now is how much further investors will push yields. Growing speculation that the ECB will begin to wind down its tightening cycle has already spurred a rally. In contrast, a recessionary economy will spur investors out of risky assets and into the relative safety of sovereign paper.