[MARKET ANALYSIS] Fixed falters once again as Iran talks about potentially expanding the scope of the war

The pattern here is a familiar one: a geopolitical supply-risk headline feeding through crude into the long end, with energy-led inflation premium doing the damage rather than growth expectations, which is why curves steepened rather than rallied on the risk-off impulse.

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[MARKET ANALYSIS] Fixed falters once again as Iran talks about potentially expanding the scope of the war

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  • The very modest bearish action at the start of the morning has given way to downside of c. 40 ticks in Bunds. Amidst a combination of factors, namely: energy upside on Iranian commentary, hawkish central banks, strong German Ifo & trade/tariff concern ahead of the US-China meeting, and also from Germany via the VDA.
  • Unsurprisingly, the bulk of the move was on the Iranian adviser Safavi intimating that the “scope of the war may expand…”, to include the Indian Ocean and other regions. An update that, over the course of around one hour, lifted Brent by over USD 2.00/bbl and pushed the US 30yr yield to its highest in over 20 years.
  • Bunds hit a 119.87 trough, nine ticks above Wednesday’s contract low. As mentioned, much of the focus has been on yield action, with upside seen across curves globally and a slightly steepening bias seen.
  • For USTs, no real move to Fed’s Williams, though he did note that pricing for another hike by end-2026 is “reasonable”. As it stands, markets imply a 38% chance of one 25bps hike by year-end, and just over a 50% chance of two. At a 104-28 contract low with yields bid across the curve.
  • Ahead, the focus remains on central banks with several speakers due, before the Trump-Xi meeting begins and the readout which is scheduled for just after 15:00BST commences. A meeting that is framed by recent remarks from Treasury Secretary Bessent that while the truce has been extended to January 2027, he does not know if a bigger deal can be done.
Context

Episodes of this kind have tended to hit the long end hardest and to lift breakevens relative to nominals, and the reported 30-year yield extreme is consistent with that channel rather than with a repricing of near-term policy. The compounding factors matter for durability: hawkish central-bank commentary and strong survey data give the selloff a fundamental leg, whereas the pure geopolitical component has historically faded quickly when rhetoric is not followed by actual disruption to shipping, freight or insurance. Williams' framing of market pricing for another hike as reasonable is notable because officials validating, rather than pushing back on, hawkish pricing has tended to be the tell that such pricing sticks. The distinction worth drawing is between the Bund move, which is driven by energy and domestic data, and the UST move, which is more exposed to the Fed pricing debate. The scheduled Trump-Xi meeting and readout is the next discrete catalyst, with tariff outcomes historically capable of moving the rates complex in either direction depending on whether the market reads the result as growth-positive or inflation-positive.

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