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[MARKET ANALYSIS] Fixed falters as energy climbs, Bunds hit by the ECB SCE, Gilts await the Privileges debate

The fixed income market is experiencing bearish momentum as energy prices rise, influenced by geopolitical tensions and a hawkish hold from the BoJ.

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[MARKET ANALYSIS] Fixed falters as energy climbs, Bunds hit by the ECB SCE, Gilts await the Privileges debate

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UK sells GBP 1bln 0.125% 2028 Gilt via tender: b/c 4.28x (prev. 4.05x), average yield 4.219% (prev. 3.336%), tail 0.3bps (prev. 0.7bps)

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  • Another bearish start for fixed income as energy climbs, and with some influence from a hawkish hold by the BoJ.
  • Energy led higher by overnight reports that Trump was not satisfied with and is unlikely to accept the Iranian proposal. More recently, journalist Mallick outlined that Iran's Foreign Minister is not returning to Pakistan after visiting Russia. Updates pushed the energy space higher in APAC trade and the European morning, with WTI back above a USD 99.00/bbl handle.
  • Most recently, the ECB SCE saw an increase in inflation expectations for the next 12 months, and for three years ahead, both saw a significant increase to 4.0% (prev. 2.5%) and 3.0% (prev. 2.5%), respectively. By way of comparison, the March baseline HICP peak was 2.6% in 2026, the adverse 3.5% for the same period, while the severe peaked at 4.8% in 2027. As such, 12-month expectations are hotter than all but the severe scenario, a point that adds a measure of hawkishness ahead of Thursday's ECB. Though this view is somewhat offset by the tightening of credit conditions and weaker loan demand evidenced in the BLS, a survey that was released alongside the CSE.
  • Amidst all this, Bunds down to a 124.87 base with a downside of nearly 50 ticks. The low was printed just after the ECB SCE release. Ahead, the bloc looks to remarks from Lagarde, but as we are in the quiet period, these will not cover monetary policy.
  • USTs down to a 110-26 base into a session that is likely to once again be dominated by geopolitics, earnings and looking ahead to the FOMC on Wednesday. We do get supply, 2yr FRN and a 7yr note offered, following a strong 2yr and mixed 5yr on Monday.
  • JGBs gapped lower on the resumption after the BoJ announcement, before then filling the move in short order. To recap, the BoJ was a hawkish-hold with three dissenters in favour of a hike, citing price concerns. Forecasts showed an increased inflation view, while the growth view was cut. Thereafter, Ueda was non-committal regarding the timing of the next hike, and seemingly attempted to temper expectations around June, commentary that had little JGBs impact but spurred notable JPY moves.
  • Gilts gapped lower by 21 ticks, acknowledging the above, and have since fallen another 29 to an 86.51 trough. If the move continues, we look to 86.00 before 85.91 from the last week of March. Gilts underperform marginally, awaiting the start of the debate and then vote on whether UK PM Starmer should be referred to the Privileges Committee or not; full primer available at 09:05BST.
Context

The ECB's increase in inflation expectations adds further pressure on Bunds and Gilts, which are already reacting to declining bond prices amidst tightening credit conditions. This environment suggests rising yields and cautious positioning ahead of ECB remarks and the FOMC meeting this week.

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