[MARKET ANALYSIS] Energy provides support to fixed income, ex-JGBs

The marked pullback in energy has weighed on yields, with fixed benchmarks firmer (ex-JGBs) across the board. No substantial move to Final PMIs or the morning’s other data points. Instead, we await details from the new round of US-Iran negotiations from this afternoon, and look back on themes from last week and the weekend; namely, JPY intervention & Fed reports/commentary. Bunds as high as 124.80, firmer by 44 ticks, but shy of the 124.94 peak from Friday and then a handful of levels from early last week between 125.04-25. Fleeting upside on a particularly poor German retail sales series this morning. Thereafter, Germany’s final Manufacturing PMI was unrevised, and showed an “impressive start” to Q3. However, caveats apply to this and were neatly surmised in the downwardly-revised EZ series, with new work inflows weak and as such headcounts continue to be reduced. Gilts, as is usually the case amid energy-driven moves, outperform. Firmer by over 60 ticks, but also shy of levels from early last week, with a double-top at 87.24 the first point vs today’s 87.12 high. Thereafter, 87.32 and 87.51 come into view. For the UK, specifics light, focus on energy as alluded to, no move to the Final Manufacturing PMI which saw a downward revision and somewhat mixed commentary. While the broader focus remains the global policy backdrop, after Bailey pushed back on edging toward a hike (keeping the extended hold narrative in play) vs commentary from and reporting around the Fed. USTs at a 108-16 peak, yet to test the 108-20+ to 108-30 highs from last week. Ahead, the space looks to its own Final Manufacturing PMI before the ISM print and then an AtlantaFed update, in addition to Treasury financing estimates. Looking back, the late-Friday & weekend focus was on geopolitics which has driven the bulk of action (see Commodities), alongside commentary from and reporting around the Fed. Musalem said the UST sell off sent a signal that credibility must be earned via communication and action. Additionally, the NYT reported that Chair Warsh is considering, and raised at the last meeting, reducing the number of policy meetings from the current eight. The latter points are potentially keeping US yields somewhat bid, and perhaps explain why USTs are yet to test the highs from last week, in contrast to peers. Finally, JGBs are under pressure. The benchmark opened higher and climbed to a 126.96 peak early on, before reversing and falling to 126.74 and since a 126.63 low, with downside of just under 10 ticks at most. A reversal that came as the US and Japan formally confirmed the joint JPY action last week, and kept open the possibility of further intervention. Amidst this, and driving JGBs lower, FX Chief Mimura added that there is a “shared understanding with the BoJ” on the topic. Following this, Japanese short-end yields have climbed and the odds of a hike in September have increased to c. 50%, while October is over 90% implied for a hike.