[MARKET ANALYSIS] Bearish start for fixed income gave way to notable, but fleeting, energy/geopolitcally inspired strength

A bearish start for fixed income, amid initial crude strength and a modest reversal of some of Monday’s action. Gilts underperformed modestly in early-trade, given the unwelcome borrowing data for the UK vs both market and OBR consensus. However, this action, of circa. 30 ticks lower in Bunds, five in USTs and over 40 in Gilts gave way to a geopolitical/energy-induced move higher and into the green. After a Kyodo source outlined that Iran has suggested to the US that it would open Hormuz in one week if the US blockade is lifted, alongside a tone change from the IRGC on negotiating with the US if needed. This lifted USTs to a 106-09+ peak, firmer by just under 10 ticks on the day. Bunds and Gilts followed, to upside of 23 ticks and just over 30 respectively. However, as the energy move pauses for breath and updates since the two above have, net, been more bullish for crude, this has unwound with fixed income now near-enough unchanged on the day. The day was always headlined by the UN General Assembly, but following the morning reporting, the speeches by US President Trump today and Iranian President Pezeshkian tomorrow now draw even greater attention; for any rebuttal of the above, or signs of tangible progress between the sides. That aside, BTPs were disappointed by the 2025 deficit/GDP revision, which remained above the key 3.0% mark that determines the EU’s EDP system. As such, we now look to see if Italian Finance Minister Giorgetti moves forward with using the Escape Clause or not. For reference, the BTP-Bund 10yr spread remained steady at 90bps at the time.