[MARKET ANALYSIS] Long-end yields continue to climb post Fed, energy influencing fixed to a degree, Gilts await the BoE
- Fixed income is lower across the board as the space focuses on Chair Warsh over the statement itself, though the complex is off worst amid a Pakistan-driven pullback in energy benchmarks.
- USTs reached a 108-06 low this morning, but remain clear of 108-01 and 108-00+ from last week; the latter is also the contract low, for reference. Amidst this, the 10yr yield has been up to 4.71%, near-enough matching the YTD peak from last week. A move that is more pronounced the further out the curve you go, with steepening still very much in play, evidenced by the 30yr yield hitting a YTD peak on Wednesday, and eclipsing it this morning at 5.24%, now looking to 2007’s 5.39% high. The 2yr retreated following Warsh, despite knee-jerking higher on the Fed holding, and has since remained around the mid-point of Wednesday’s 4.21-4.39% band.
- Heading into the Fed, around a 30% chance of a hike was implied. Now looking to September’s meeting, which will come a few weeks after the Jackson Hole Symposium, the odds of a 25bps hike have increased from around a 55% implied probability to c. 57%, though the main move has been a paring of the odds of it target rate being at 4.00-4.25% (i.e. a July and September hike) to just 1% vs 20% pre-July’s hold; in-fitting with the pullback in short-term rates and curve steepening. Finally, the odds of a September hold now stand at 41% from 24%, as the mentioned 4.00-4.25% pricing reallocates.
- Bunds softer, down by 30 ticks as it stands but around 20 ticks clear of the 124.30 base. Broadly, following USTs lower before then finding respite as energy pulled back on the morning’s updates (see Commodities). No move to the morning’s data, with the regional German CPIs in-line with consensus for an uptick in the 13:00BST mainland print, while Q2’s 1st GDP print surpassed expectations at 0.2% Q/Q, benefitting from exports and seemingly indicative of other nations getting hit harder than Germany. Thereafter, the EZ-wide 1st read also surpassed consensus, though once again Ireland may be distorting it.
- Gilts in-fitting with the above, are lower by 25 ticks and the same amount clear of the 86.31 trough. Attention today on the BoE, where a hold is expected but the risks are hawkish, and this may be reflected in the number of dissenters ticking up, with Mann the one to watch; full Newsquawk preview available.
- JGBs, briefly, were in-fitting overnight, though with additional pressure seen after a soft 2yr tap and as participants now look to the Friday policy announcement.
The configuration described, front end anchored by a hold while the long end sells off, is the classic bear-steepening signature that appears when the policy question shifts from near-term rates to term premium and the term structure of future risk. Episodes of this kind have tended to persist while inflation-linked drivers, here energy benchmarks, are bid, and to pause when those drivers retreat, which is the mechanism visible in the cross-market respite noted in the wrap. The transmission between commodities and duration runs through breakevens at the long end rather than through the policy-sensitive twos, which is why the divergence between the two-year holding its range and the thirty-year printing fresh highs is the analytically important feature, not a contradiction. Attention now reallocates along the calendar: the BoE decision with its dissent count, the subsequent Japanese policy announcement, and the symposium window that historically serves as the venue where chairs signal or foreclose the next move, so pricing for the following meeting tends to drift until that event resolves. Auction results, as the soft short-dated tap overnight illustrates, are the usual tell for whether long-end supply is being absorbed cleanly while steepening is in play. Prior form from hawkish dissenters at the BoE has been that rising minority votes precede rather than accompany a turn, making the vote split the durable signal rather than the hold itself.