Rising geopolitical tensions between Israel and Iran are fuelling the rally in USD duration that started post US CPI this week. The situation in the Middle East will likely continue to drive some degree of risk-off response in rates into the weekend in case there is further escalation. Oil prices rallied hard, and gold has risen towards the highs. We do note that reaction in USD markets has been quite contained. That said, and while our preferred bias is to sell rallies, we wouldn’t stand in front of the current move lower in yields. We see the next resistance for 10Y UST yields around 4.28% (200-day MA). The situation in the Middle East and the reaction in oil markets makes us worry about a future inflation spike. This “threat” may be enough to see the front-end more anchored (unable to rally on the risk-off) and some inflation premium being priced throughout the curve.
On the inflation point, the PPI figures released yesterday also surprised to the downside. To us, it is still too early to conclude “happy days” on tariffs (especially with rising geopolitical tensions and commodity prices in the mix), and, in any case, the Fed will want to see several prints before committing to further policy easing. Wait and see untouched. The question is what happens to the Dots, with some analysts looking for a move from 2 to 1 cut in 2025. On another note, note that the G7 summit starts on Sunday.
Relatively quiet day in terms of EUR events, with final CPI figures, April’s EZ trade balance and industrial production. EUR rates markets will likely focus on geopolitical tensions and, in line to our very short-term view in USD rate, the most likely scenario is for the duration bid to continue. Going a bit more micro, an article on a proposal to let Dutch pension funds extend the window of implementation made the rounds yesterday, putting the steepening we have seen in 10s30s EUR swap spreads to the test. We suspect that part of the latest steepening has been on the back of FM positioning (several Dutch PF have announced different timelines to transition, but they are usually between 2026 and 2027; hard deadline is 1 January 2028), so this flattening may as well be an adjustment to a potentially later transition.
To add to the softer labour market and GDP data seen this week, the REC survey reported that worker supply has increased by the fastest pace since the pandemic in May and – another sign that the UK labour market is easing. Employers look to be holding back on hiring. Our SONIA Z5 receiving position has been performing well, with next UK-centred event being today’s BoE 12-months inflation survey, CPI (Wed) and the BoE meeting (Thu). Data so far points to a dovish hold, but August is already priced at 80% chance, which raises the bar in terms of dovishness needed to fully price it, which is why we prefer to receive Z5.
Risk-off session in Asian equities on the back of rising geopolitical tensions between Israel and Iran. JGBs and the JPY FX were well supported as a result, with the JPY rates curve flattening into 10s. Focus is starting to shift onto next week’s BoJ, where policy rates are expected to remain unchanged but there is ongoing speculation about changes to the BoJ’s buying plans. Expectations are for a JPY200bn reduction in JGB buying from April 2026 and a potential restructuring of the operational super long end categories.
