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[MARKET ANALYSIS] Fixed income benefitting from lower energy prices as hawkish pricing pares back slightly

The fixed income market is showing strength due to a decline in energy prices and optimistic geopolitical developments, notably regarding the Iran conflict.

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Russia's Kremlin, when asked if Russia has given Ukrainian troops two months to leave Donbas, says Ukrainian President Zelensky should have taken the decision to withdraw his forces "yesterday"

Germany sells EUR 3.025bln vs exp. EUR 4.0bln 2.50% 2032 Bund: b/c 1.11x (prev. 1.51x), average yield 2.78% (prev. 2.60%), retention 24.3% (prev. 20.1%)

[MARKET ANALYSIS] Fixed income benefitting from lower energy prices as hawkish pricing pares back slightly

BoE FPC Minutes: Investor sentiment relating to risky credit markets, particularly private credit, had worsened before the conflict started

UK PM Starmer says the fuel duty will remain where it is until September

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  • An overall positive start in the fixed income benchmarks, with energy prices falling and higher hopes of a potential end to the Iran conflict. President Trump stated that the war is coming to an end, while a White House official said that the President is confident that an agreement will be reached soon.
  • USTs are trading at the upper end of a 111-10 to 111-14+ range, albeit off best levels, as energy prices rebound slightly. Price action is set to remain rangebound ahead of a flurry of data and Fed speak, while Trump is set to speak at 21:00EDT/02:00BST.
  • Bunds, in tandem with its peers, are gaining and currently holding above the 126 handle. The 10yr yield extends further below 3.0%, printing a trough at 2.933% before bouncing slightly. EZ final manufacturing PMI ticked slightly higher above the prelim. Figure but failed to drive any move in EGBs. In addition, ECB speakers reiterated the impact higher energy prices have on the European economy.
  • Gilts outperform, continuing to be the beneficiary of lower energy prices, as BoE pricing remains sensitive to oil prices. Pricing for rate hikes have pulled back, now price in 44bps of hikes in 2026.
Context

As expectations for rate hikes wane, especially from the BoE, yields are reflecting a more cautious outlook, which could signal an increasingly range-bound trading environment ahead of key data releases and Federal Reserve commentary.

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