[MARKET ANALYSIS] Core fixed bid on haven allure and with growth implications in focus, however, OATs lag with the spread to Germany over 170bps

• In brief, a haven bid is seen across most core fixed income, as the geopolitical situation escalates and yields prove somewhat resilient to the energy upside, as much of that is priced by this stage, with focus instead increasingly on the growth side of the equation.
• USTs just off a 105-19+ peak, firmer by 15 ticks at best. The docket ahead is relatively light, but the focus is firmly on geopolitics after the activity seen in APAC hours and the continued dissemination of punchy rhetoric in the European morning.
• Bunds also bid, and in-fitting with USTs for the most part. At a 121.90 high, firmer by 50 ticks. As above, specifics are relatively light and the focus is firmly on geopolitical developments for core counterparts.
• In brief, while the focus for core debt is increasingly on the growth implications of the ongoing Middle East situation, this is not to a degree that is likely to dissuade policymakers from tightening in the weeks ahead, with the BoE for instance expected to start its tightening cycle; though, it is expected to be brief.
• Continuing with the UK, Gilts opened with modest gains, given the above haven allure factoring initially, before then being briefly unwound/offset by energy’s influence. However, Gilts broadly conform to peers, with gains of around 15 ticks currently, some 10 off the 84.73 peak.
• More pertinently, those under significant fiscal scrutiny are seeing a selloff as the growth-hit and inflationary angle combine to further knock the fiscal backdrop. A point that is particularly evident in France, with OATs down by over a point at most, lifting the 10yr yield to a 5.14% high, and widening the OAT-Bund spread to 1.73%, the highest since January 2011.

In risk-off episodes of this kind, core government debt tends to catch a bid while peripherals under fiscal scrutiny cheapen, a pattern that has played out repeatedly in the euro area when geopolitical stress interacts with already-stretched sovereign balance sheets. The distinction here is between the haven-driven rally in Treasuries and Bunds, where the growth concern dominates, and the OAT selloff, where the inflationary and fiscal implications of the energy shock are compounding existing vulnerability to the spread. OATs lagging to their widest against Germany since early in the last decade reflects France’s sensitivity to any deterioration in the growth-fiscal tradeoff, with the transmission channel running through debt sustainability concerns rather than pure haven flows. The BoE’s expected tightening cycle remains on track despite the geopolitical overlay, suggesting that short-end policy paths are still being set by domestic inflation dynamics rather than the external shock. The immediate focus is whether the geopolitical escalation continues to drive the haven bid or whether the growth scare deepens enough to challenge the tightening consensus, and whether OAT underperformance begins to feed through to other fiscally exposed sovereigns.