[MARKET ANALYSIS] A bearish start for fixed but the complex is now well off lows

• Another bearish session for fixed as, despite the IEA stockpile announcement, energy benchmarks are on the front foot once again with Brent eclipsing USD 100/bbl in APAC trade and Dutch TTF as high as EUR 53.80/MWh. In brief, energy strength comes as the market digests the time it will take for the IEA flows to hit the market, the Middle East conflict showing no immediate signs of stopping, and the associated ongoing Strait of Hormuz block.
• Given this, USTs are lower by a handful of ticks and holding just off a 111-21 base. If the move continues, we look to support at 111-19+, 111-10 and 111-08+ from earlier in the year. The US docket is headlined by Fed speak and then a 30yr auction to round off the week, after a poor 3yr and a 10yr that was an improvement from the last outing, but softer than the average tap.
• Gilts lower by around 40 ticks at most, hitting a 89.36 trough, which, while notable is still some way clear of the 88.80 MTD low and the 88.52 contract base. Pressure a function of the referenced energy moves and a return towards some of the hawkish BoE pricing seen at the start of the week, with around a 20% chance of a hike by end-2026 currently implied.
• Finally, Bunds followed suit at first and hit a 125.91 base, taking the German 10yr yield to another multi-year high. Amidst this, market pricing got to around an 80% chance of two 25bps hikes by the ECB in 2026; reminder, at most we have seen two hikes fully priced in recent sessions. However, this has since pared with the benchmark now actually in the green. No clear or overt fundamental behind the gradual turnaround, but the action is potentially a function of energy benchmarks easing from overnight peaks.

The fixed income complex opened bearish, primarily influenced by rising energy prices and geopolitical tensions, causing USTs and Gilts to decline. However, there appears to be recovery potential as the market reassesses energy dynamics, leading Bund yields to stabilize after an initial drop. This reflects a complex interplay between energy prices and evolving rate hike expectations from central banks, which could influence future market direction and investor sentiment.