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[MARKET ANALYSIS] Fixed income follows energy but is relatively contained thus far, Gilts marginally underperform

The fixed income market is under pressure following geopolitical tensions related to the Hormuz blockade and a cargo incident near Iran, which have affected energy prices.

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[MARKET ANALYSIS] Fixed income follows energy but is relatively contained thus far, Gilts marginally underperform

[MARKET ANALYSIS] European bourses opened higher but have since trundled lower, ASM International +8% after a strong Q1 and guidance

[MARKET ANALYSIS] USD tracks oil prices, NZD repricing continues and Sterling unreactive to mostly in-line inflation data

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  • A marginally bullish morning, at first at least, for fixed after relatively contained overnight trade. Modest upward impetus came after the Tasnim piece regarding the Hormuz blockade; though, it does appear to be a re-run of remarks from Tuesday.
  • More recently, the complex has come under pressure after a UKMTO report around a cargo ship incident 8nm from Iran; reacting to the upside in energy, the MTO report has been spurred. An update that follows a vessel being fired on 15nm from Oman this morning.
  • USTs got to a 111-13 peak after that report, then gradually faded to unchanged and to a 111-07+ low thereafter, with losses of two ticks at most vs earlier gains of 4+. For the US, the main scheduled event is the 20yr auction. However, focus will undoubtedly be on any update to the geopolitical situation; see the morning's analysis piece for more.
  • Gilts opened higher by 11 ticks, in line with the action in Bunds at the time. Thereafter, the benchmark climbed to a 88.08 peak with gains of 20 ticks at most. Upside also spurred in reaction to the morning's CPI series, with the headline as forecast and the core figure cooler-than-expected. However, the all-important services lifted by more than expected vs the prior; albeit, that itself is somewhat caveated by the early Easter, and may be partially unwound in April.
  • Furthermore, the signs of raw material factory prices jumping M/M, given the energy surge, could be taken as an early sign of second-round effects, and thus prompt some hawkishness in April by the BoE. Digestion of this may explain why Gilts have dipped further into the red than peers, Gilts -22 ticks at most vs -17 for Bunds; albeit, the typical outsized Gilt performance and/or domestic political turmoil may also be factoring.
  • Overall, for the BoE, they will likely be willing to wait and see for more data at this stage, as the lack of overt second-round effects means they have time to assess and weigh the growth vs inflation situation.
  • Bunds in-fitting with the general move. Hit a 125.81 peak with gains of c. 15 ticks before moderating and fading alongside the latest energy uptick. Enter a window of potential ECB speak just off a 125.51 low.
Context

While Gilts started the day higher, they have underperformed Bunds, particularly after UK CPI data showed cooler core figures but an unexpected rise in services, suggesting potential second-round inflation effects that could influence future BoE hawkishness.

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