[MARKET ANALYSIS] USTs are flat, whilst Bunds and Gilts are pressure by elevated gas prices

• Global fixed benchmarks are mixed this morning. USTs (U/C) are flat, whilst Bunds (-40 ticks) and Gilts (-44 ticks) extend on recent pressure. Whilst USTs appear to be taking a breather following the recent downside, Bunds and Gilts continue to be subject to hefty selling, amidst higher energy prices and ongoing fears surrounding fiscal/debt sustainability.
• USTs currently hold within a 107-09 to 107-14 range. For the short-end, focus will no doubt be on key domestic data which will help decide between whether the Fed opts to hold or hike at its September meeting. The US Jobs Report is due this Friday, and the CPI late next week; a hot report on both fronts will likely see money markets extend their bets of a hike this month (currently seen at 68%).
• The US yield curve is ever-so-slightly steeper this morning. The US10yr (4.80%) remains at elevated levels, with focus on whether it can move towards the 5.00% mark. That would likely require a significant escalation on the geopolitical front and/or hawkish NFP/CPI reports to cement a September move. Even if that does not come to fruition, the 10yr may remain above the 4.75% mark until the geopolitical situation materially improves.
• Bunds and Gilts are ultimately pressured by elevated European gas prices, which are the highest in three years. There has been a lack of material newsflow dictating price action this morning, with only ECB’s Makhlouf and Nagel on the wires. The former said that the ECB should be ready to lift rates further, adding that inflation and growth metrics make him “uneasy”.
• For Gilts, the first PMQs under PM Burnham draws focus, for potential updates on the cost of living, fiscal space and other key themes.
• On the trade front, the US is reportedly preparing to launch its investigation under Section 301 into EU countries for unfair trade practices, the Times reports. The report added that the UK will not be on the list of countries subject to investigation.

The split between a flat UST complex and heavy selling in Bunds and Gilts is a familiar pattern when the shock is energy-led rather than policy-led: European curves absorb the inflation impulse directly through the gas channel, while Treasuries trade on their own domestic calendar and can even catch a relative bid. The mechanism runs from gas into European inflation expectations and the front end of ECB and BoE pricing, and in past episodes of this kind the underperformance of European paper versus USTs has tended to persist as long as the energy leg does, fading only when gas itself turns. Hawkish commentary from ECB officials of the more traditionally cautious camp adds to the pressure, since remarks from that wing have historically carried more signal about the committee's centre of gravity than from its known hawks. The Gilt layer carries a fiscal premium on top, and debt-sustainability narratives have tended to show up first in the long end and in swap spreads rather than in front-end pricing. The near-term calendar, US payrolls and CPI, is the established pivot for whether USTs rejoin the move or continue to decouple, and the 10yr sitting at a round-number threshold is the kind of level that has previously required a data catalyst rather than drifting through on its own. Trade-investigation headlines of the Section 301 type have historically been slow-burning, with the initial market read-through limited to the FX crosses of whichever economies are named.