[MARKET ANALYSIS] Tentative trade across fixed benchmarks awaiting US CPI

Global fixed benchmarks are trading tentatively on either side of the unchanged mark, following similar indecisive action in the energy space. This follows on from overnight US strikes on Iran, in response to the downing of a US helicopter earlier in the week. This latest attack led Iran to launch retaliatory strikes against Bahrain, Kuwait and Jordan. As for the progress to peace, a WH official stated that “nothing has changed in their position regarding an agreement with Iran, and it is still close despite the strikes”. However, the Iranian Foreign Minister stated that they need to reassess, following the recent strikes; he added that the US harms diplomatic efforts.
USTs (-2 ticks) trade with very mild losses and hold towards the bottom of a 109-03 to 109-08 range. The tentative action today is explained by the uncertain geopolitical environment, and as markets await US CPI/10yr auction later today. Starting with the former, markets expect the headline to rise 0.5% M/M (prev. 0.6%), driven primarily by another jump in energy prices; meanwhile, core inflation is seen rising 0.3% M/M (prev. 0.4%). This inflation report follows a string of hawkish activity data (ISM Services/Manufacturing) and labour data (solid NFP report). Should this theme also be reflected in today’s CPI report, policymakers at the Fed may decide to remove commentary surrounding the easing bias at next week's policy announcement. Heading into today’s data, markets assign a 44% chance of a hike in September, and fully price in 25bps hike by December.
Bunds (-1 tick) and Gilts (+1 tick) trade on either side of the unchanged mark, following the tentative action seen above. Domestic updates today have been lacking, but focus for the EGBs will be on a 10yr Bund auction. As it stands, the GE 10yr yield holds slightly above the 3% mark, driven higher by elevated energy prices and sticky inflation. The sale should go well, with some traders potentially booking profits at elevated levels. The geopolitical environment appears to be easing (but remains incredibly uncertain), and with some fund managers believing fixed income will reclaim its safe-haven status, yields should begin to ease from recent peaks.
JGBs (-6 ticks) are lower a few ticks, with focus overnight on a sluggish 30yr auction. The b/c printed at 2.94x, the lowest in a year, whilst the avg. yield rose from the prior. The auction perhaps reflects some uncertainty surrounding the volatile geopolitical environment, and as markets await the BoJ next week. A 25bps hike is widely expected, with focus on guidance beyond June and on the Bank’s tapering plans. Recent source reports have suggested that it will opt to pause its current tapering plan by Apr’27.