[MARKET ANALYSIS] Global benchmarks initially firmer, but hit as the risk tone deteriorated

Global fixed benchmarks opened the European session with a positive bias, but have gradually edged off best levels as the risk tone deteriorated as the morning progressed. Initial optimism was facilitated by comments from both Israeli and Lebanese officials, who said that a ceasefire is expected soon, and talks are expected to continue in the near-term. On the Iranian front, President Trump said that “he wants to bring the war in Iran to a swift end”. Thereafter, in early morning trade, a military advisor to the Islamic Revolution Leader said Iranian Armed Forces’ launchers are ready to hit American warships and sink all of them – a comment which weighed on the risk tone at the time, leading to upside in the crude complex, which pressured global fixed paper.
USTs are firmer by a couple of ticks and currently trades at the lower end of a 111-11 to 111-17 range. Ultimately, moving at the whim of geopolitical developments, with markets now awaiting clear details on when/if the second round of Iran-US talks will begin. From a domestic perspective, weekly initial jobless claims(215k expected from 219k) and continuing claims (exp. 1.84mln from 1.794mln), NY Fed services activity, Philly Fed manufacturing are all due.
From a yield perspective, the US 2yr hovers around 3.755%, and around recent troughs, but well off the lows seen since before the pre-war. This is in stark contrast to the equities complex, whereby the S&P 500 has entirely reversed the losses seen during the height of the Iran conflict. Perhaps more so, a bit of “pent-up demand” for the equities complex, with SocGen analyst Lapthorne suggesting that “investors have been conditioned to buy the dip”. Nonetheless, the dynamic between fixed and equities clearly indicates that bond traders still see some risks to monetary policy on a medium-term horizon.
Bunds are firmer by around 15 ticks and currently trade within a 125.32 to 125.62 range. German paper, as above, is off its best levels as the risk tone slipped a bit. Domestic newsflow has been fairly limited this morning, aside from an updated Goldman Sachs call for the ECB; analysts now expect the ECB to deliver 25bps rate hikes in June and September 2026 (prev. saw April and June), citing expectations that energy prices will stay high through 2026, feed through materially into inflation in the coming months and keep ECB communication largely hawkish. As it stands, money markets fully price in a 25bps hike in July. Focus later will be on the ECB Minutes (Mar), where the Bank kept rates steady – traders will be cognizant of any commentary pertaining to the Middle East situation.
Gilts are essentially flat and trade within an 88.77 to 89.07 range. Slightly underperforming vs peers, given the hawkish impulses from a stronger-than-expected UK GDP report. In brief, on a monthly basis, GDP rose 0.5%, while yearly saw an increase of 0.1%. ING writes "UK output surged in February, but it's in line with a trend dating back to 2022, where growth is stronger in the first quarter than across the rest of the year. We're taking this latest data with a pinch of salt".