[MARKET ANALYSIS] Yields jump alongside strength in energy prices

Global fixed benchmarks are broadly lower as the complex takes leads from the strength in energy prices, after yet another US-Iran flare-up. In brief, the US struck Iran’s Qeshm Island, which was then met with retaliatory Iranian strikes on US bases in Kuwait; explosions were also reported in Saudi Arabia, and air sirens were set off in the UAE.
USTs (-5+ ticks) are lower this morning and trade at the lower end of a 109-15+ to 109-24+ range. And unsurprisingly, yields are firmer across the curve, with mild outperformance in the short end. Much of the action recently has been dictated by geopolitical developments, but attention this week will turn back to domestic data. Thus far, ISM Manufacturing topped expectations, whilst Prices Paid slipped from the prior (though still remains elevated); on the jobs front, JOLTS Job Openings topped expectations. Both are factors which play into the hands of the hawkish members at the Fed. Attention today now shifts to ADP, ISM Services and then the NFP report to end the week.
Bunds (-30 ticks) follow the bearish bias and hold towards the bottom end of a 125.71 to 126.03 range. Today saw the release of PMI Final metrics from various EZ countries, which were subject to very mild upward revisions. The EZ-wide figure remained in contractionary territory at 48.5; the inner report suggested that whilst the ECB may provide an insurance hike at the June meeting, it may find it hard to deliver more tightening if the economy continues to weaken.
Citi on EGB supply in June: forecasts EUR 128bln of gross EGB supply (vs 143bln in May), lifting the NCR to EUR 93bln. The breakdown has 10yr supply at its lowest monthly level YTD, longer-dated is expected to increase.
Gilts (-45 ticks) underperform vs peers, given their high sensitivity to rising energy prices; currently holding at the mid-point of a 87.78 to 87.90 range. Yields are firmer across the curve, but with mild outperformance in near-term yields. Some attention recently has been on comments made by BoE’s Greene in the prior session, where she stated that “the case for hiking rates grows as the conflict continues”. Markets assign a 92% chance of a hike in September, and fully priced in by November.