[MARKET ANALYSIS] Energy continues to dictate fixed as we count down to Wednesday's FOMC
- Another firmer session for fixed income, as the pause in strikes between the US and Iran continues and after US President Trump suggested that they are talking. Further, Reuters sources this morning suggest that Oman has presented Iran with a proposal for voluntary Hormuz fees, and Al Jazeera says Iran is demonstrating some “flexibility” over Hormuz, points that have added further pressure to energy.
- Broadly speaking, we now await an update to the above, and in particular how the talks between the US and Iran are going and if it can come to a meaningful pause in the conflict.
- USTs bid by around five ticks at best, peaking at 108-24+, just above Monday’s 108-22 peak, but still shy of last week’s 109-00 and then 109-08+ peaks. The data ahead features a handful of data points before a 7yr auction. Monday’s 2yr was strong, though the 5yr was soft.
- Bunds reside around 10 ticks off the 125.21 high, though still with gains of the same amount, trading directionally in-line with USTs but with a slightly greater magnitude of gains, potentially as USTs look to the Fed and the c. 30% implied probability of a July hike.
- No move to the morning’s supply from the Netherlands, UK (tender) or Italy.
- Gilts opened on the front foot and, as usual, post modest outperformance in the energy-driven environment. Gapped higher by 10 ticks at the open before climbing to a 87.48 peak, taking out last week’s best and now looking to 87.60, 87.72 and 87.82 from the week before that.
Episodes in which Middle East de-escalation talks take the geopolitical premium out of crude have followed a recognisable sequence in this kind of market: energy falls first, the disinflationary read-through then rallies duration, and the long end of the UST curve outperforms while curve trades on relative haven status adjust, with Gilts and Bunds tending to track Treasuries with their own beta. The pattern is well established: the bond rally driven by a geopolitical pause is hostage to the headline tape, and prior episodes of tentative US-Iran engagement, including proposals floated through Omani intermediation, have repeatedly reversed on a single failed round of talks or a renewed incident, so moves built on reported 'flexibility' carry more gap risk than moves built on data. The nuance worth noting in the tape is the divergence: Bunds gaining slightly more than USTs is consistent with Treasuries carrying an event premium that European duration does not, namely the FOMC and a market-priced residual probability of a hike, which caps the US rally into the decision. The auction calendar adds a second tell: a strong short-dated sale followed by a soft belly sale of the kind described has historically flagged where sponsorship is thinning, making the 7yr a cleaner test of whether the energy-led bid has real money behind it. The follow-ons are concrete: confirmation or denial of any Hormuz fee arrangement, whether the strike pause becomes formalised, and then the Fed statement and press conference, where the reaction function to energy-driven disinflation is the live question. As a research-sheet framing rather than a discrete event, the signal is about positioning and sequence rather than direction.