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[MARKET ANALYSIS] Fixed benchmarks tread water heading into US CPI and US-Iran peace talks

Fixed benchmarks are flat as markets await the US CPI release and watch for developments in US-Iran peace talks.

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[MARKET ANALYSIS] Fixed benchmarks tread water heading into US CPI and US-Iran peace talks

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  • Fixed benchmarks are flat/slightly firmer this morning, as the complex awaits US CPI later today and heading into the weekend, where US and Iranian officials are to meet for peace talks in Pakistan. While preparations are proceeding "full steam ahead" in the Pakistani capital, both sides have issued warnings that could still derail the meeting. Heading into the confab, US President Trump said he is optimistic that an Iran peace deal is within reach, but warned that if no deal is reached, “it is going to be very painful”.
  • USTs are currently flat, with price action lacklustre heading into US CPI. Currently trades within a 111-05 to 111-11+ range, with the 2yr yield hovering near familiar levels at 3.795%, but still well off the extremes seen during the heights of the Iranian war. Traders are currently awaiting the US inflation report, where analysts expect consumer prices to rise by 0.9% M/M (prev. 0.3%), and the annual rate to jump to 3.3% Y/Y (prev. 2.4%); core inflation is expected to rise 0.3% M/M (prev. 0.2%). Officials say inflation remains too high, with upside risks if oil shocks spill into core prices and expectations, although expectations are still seen as well anchored at this point.
  • Recapping the action this week, USTs are currently higher by 16 ticks vs the Monday open, with strength facilitated by ceasefire related optimism – however, US paper has pulled back from highs given the fragile nature of the two-week pause so far. US 2s10s is near enough unchanged since the start of the week, but did experience some steepening amidst the initial ceasefire related optimism.
  • Bunds and Gilts were initially flat, but have recently dipped into the red as energy prices caught a slight bid; both are currently just towards session lows. Earlier, Final German Inflation was unrevised in March, and had little impact on Bunds this morning. The action this week across Bunds is reflective of the easing tensions in the Middle East, with the 2yr yield now residing around 2.56% vs the Tuesday open at 2.65%. This has also been reflected in ECB pricing – with money markets fully pricing in an ECB rate hike in April towards the start of the week, now, only 6bps. The temporary ceasefire will allow policymakers to bide their time and assess whether second-round inflation effects filter through into the economy – markets still pricing in two hikes by year-end.
Context

The mixed sentiment stems from trader caution regarding inflation, following expectations for a notable rise in consumer prices, which could influence the Federal Reserve's rate decisions. This backdrop is keeping fixed income assets in a holding pattern, indicating potential volatility, particularly if CPI data diverges from predictions or if geopolitical issues exacerbate.

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