[MARKET ANALYSIS] Fixed income benchmarks are hit as oil prices continue to rise, creating a negative feedback loop by exacerbating fiscal concerns

Global fixed benchmarks are in the red this morning, continuing the action seen on Monday. Overnight, JGBs were hit amidst higher energy prices, ongoing fiscal concerns and after Treasury Sec Bessent directly urged the BoJ to hike in September. Despite all this, the 10yr auction was well received, with a 3% yield seemingly enough to feed investor appetite, at least for now. USTs (-4 ticks) are off by a handful of ticks, Bunds (-30 ticks) follow suit whilst Gilts (-80 ticks) are the clear underperformer on its return from holiday – in catchup trade to peers. In the European morning, the move lower has extended, with energy prices taking another leg higher on reports that two oil supertankers were hit by projectiles. As mentioned above, global yields have soared to multi-year highs amid higher oil prices, and hawkish Fed repricing. This has spurred somewhat of a negative feedback loop, with higher yields only exacerbating fiscal/debt concerns. The US10yr resides beyond the 4.75% mark (highest since Jan’25), whilst the GE10yr (3.32%) holds at multi-decade highs. Aside from energy-dynamics, Bunds have had domestic data to digest. In the morning, German Retail Sales fell more than expected – though spurred little reaction at the time. Thereafter, the EZ-wide Manufacturing PMI saw an incremental revision lower. The report suggested that “a further softening of producer price increases, even in the midst of sustained oil market volatility, helps to alleviate broader inflation worries. That said, the pace of disinflation is starting to level off”. In the UK, Gilts are the clear underperformer this morning; the UK10yr (5.23%) has reached levels not seen since the GFC. This would be a significant worry heading into the Autumn Budget, which local press is beginning to increase its coverage on. An ex-Treasury official suggested that the 20yr Gilt is 70bps above what is assumed at the Spring Forecast. They noted that if this increase was applied across the curve, it would result in a GBP 6bln debt increase by 2029/30. Therefore, it is clear that PM Burnham and his Chancellor Healey will require a significant decline in yields soon, to allow them to implement some of their key commitments; energy relief, cost of living measures and transport caps. To remind, the Autumn budget will be delivered on 28 October 2026.