[MARKET ANALYSIS] Fixed benchmarks benefit from lower energy prices whilst JGBs move lower post-BoJ

Global fixed benchmarks (ex-JGBs) started the European session trading on either side of the unchanged mark, with the complex ultimately taking a breather from the gains seen in the prior session. However, some pressure was seen in the crude complex soon after the European cash open, which helped lift fixed paper to highs. As such, yields are lower across the curve, but with underperformance now in the belly of the curve, in contrast to short-end underperformance seen on Monday; nonetheless, the bull-steepening bias remains. The slight pressure in the belly is perhaps indicative of markets beginning to price in the economic impact of the resumption of flows through the Strait of Hormuz; recent updates out of Qatar have suggested that it can restore half of its LNG output within a month, 80% within two months  JGBs (-47 ticks) lag vs peers, given the BoJ’s decision to hike rates by 25bps (as expected) and its announcement to pause the tapering of JGB purchases from FY27. The accompanying presser provided little updates, with Deputy Governor Uchida avoiding any commentary pertaining to forward guidance. As it stands, markets assign an 85% chance of a hike by year-end, so focus remains firmly on Ueda’s comments when he returns from hospital. USTs (+5 ticks) trade at the upper end of a 109-19 to 109-26+ range. Overnight action saw the benchmark move sideways around the unchanged mark, before then moving higher as energy prices fell. From a yield perspective, the US 10yr remains just shy of the 4.50% mark, last at 4.44% - and well beyond pre-war levels at c. 4.00%. Economists will argue that, for now, the damage to the global economy has already filtered through; the US is dealing with elevated inflation, which may keep yields propped up in the short-term. Bunds (+20 ticks) and Gilts (+20 ticks) follow the bullish bias mentioned earlier, and trade towards their respective highs. The former will have ZEW metrics to digest, whilst the latter will eye the 2036 Gilt auction to gauge investor sentiment heading into the BoE and then the UK Makerfield by-election. That auction has two-sided risks, with demand potentially propped up by the decent coupon on offer, though some investors may wait on the sidelines to see whether Burnham can return as an MP. As a reminder, PM candidate Burnham is seen as the worst option for the Gilt market given fears surrounding fiscal discipline and high defence spending.