[MARKET ANALYSIS] Fixed income reacts to the energy pullback, no move to Ifo or Kazimir, looking to supply

A firmer start to the week for fixed benchmarks, reacting to the notable downside in the energy space with Brent moving below the USD 90/bbl mark to a USD 85.50/bbl base for the October contract. In short, yields have retreated to the benefit of fixed benchmarks given the pause in US strikes on Iran since late Friday. However, the US CENTCOM commander has advised the administration that the next possible step is to return to a large-scale military operation. For USTs, we await a 2yr and 5yr auction today, before a 7yr on Tuesday and then the Fed on Wednesday. Elsewhere, Sunday marked 100 days until the Midterms. The latest poll from Emerson, conducted on the 23rd of July, gave the Democrats an 11pp lead over the Republicans, while an Ipsos survey also on the 23rd had it much closer at just 3pp. As a reminder, most of the primaries have now taken place, though there are still a notable number before they conclude on September 15th, into the November 3rd election day. Currently, the base case is for the Democrats to take the House while the Republicans will hold the Senate, exacerbating the “lame duck” status of President Trump’s final two years. As it stands, USTs are firmer by just under 10 ticks, holding around a 108-22 peak, matching the best from the 22nd, yet to approach the 109-00 high from the 21st and then last week’s 109-08+ peak. Bunds in-fitting with the above, benefitting from the mentioned crude pullback and more keenly as the region's gas benchmark retreats below the EUR 60/MWh handle. Bunds have peaked at 124.95, yet to test the figure or, by extension, the 125.10 best from last week. No move to Ifo this morning; overall the July series was constructive, though the current conditions component came in below consensus, likely capped by the period's energy moves. No move to ECB’s Kazimir, who stuck to his hawkish script, in saying the bar for him to not support a hike in September is very high, as a hike would be warranted even if the inflation situation saw an improvement. Finally, Gilts gapped higher given the bias from the above, and have since extended above the 87.00 handle to an 87.24 peak with gains in excess of 50 ticks; but stopped just shy of the 87.37 high from last week. Upside a function of the usual energy-related out/underperformance. Additionally, the Huffington Post suggested that UK PM Burnham has hinted that he will make it more difficult for people to claim benefits, a point that may be assisting Gilts somewhat as well.