[MARKET ANALYSIS] Global bonds slip as the risk tone deteriorates

JGBs were pressured throughout APAC session, essentially following peers. Narrative remains the same, with inflationary implications of the Gulf war keeping traders away from global fixed benchmarks. For Japan specifically, Finance Minister Katayama warned that Japan is not fully out of deflation, whilst BoJ’s Himino reiterated that the BoJ is keeping rates accommodative, and will continue to adjust the degree of it.
USTs are lower. US paper spent much of the overnight session trading sideways, alongside weakness across the crude complex. However, as energy prices turned positive – the benchmark also dipped off best levels in the European morning. The geopolitical situation remains unchanged, with missiles being launched from both sides – but updates related to the Strait of Hormuz helped to improve sentiment, including; a) China is in talks with Iran to allow safe oil and gas passage through Hormuz, b) US allowed India to purchase Russian oil for 30-days. USTs now trade at the lower end of a 112-03 to 112-14+ range.
Markets now await the US NFP report. The consensus looking for 59k from a prior 130k; the Bloomberg whisper number is 65k. US retail sales, released at the same time as the jobs data, is expected to show headline falling by -0.3 M/M in January. There are also a slew of Fed speakers dotted throughout the day.
Bunds follow peers, for the same reasons as above, and currently towards the bottom end of a 126.96 to 127.32 range. European newsflow has seen a few ECB speakers take to the wires, to generally touch on the Iran situation, whilst Escriva said it is “highly unlikely” that the ECB touches rates at it next meeting. From a yield perspective, the 10yr yield now trades at 2.868% (vs YTD high at 2.909%). Thereafter, 2.938%, a peak spurred by the mini-banking crisis surrounding the collapse of First Brands.
Gilts underperform, lower by around 75 ticks and trades at the bottom end of a 90.43 to 91.25 range. Underperformance which can be explained by, a) net-importer of energy, b) BoE rate cut expectations entirely priced out for the year; pre-war pricing indicated a cut in either March or April. A lot of focus has been on the front-end Gilt situation, with the 2yr yield now surging beyond 3.90%, to now approach the 4% mark from mid-October 2025 – back where traders were increasingly sceptical of Chancellor Reeves and her Autumn Budget.