[MARKET ANALYSIS] Long-end yields continue to climb post Fed, energy influencing fixed to a degree, Gilts await the BoE

Fixed income is lower across the board as the space focuses on Chair Warsh over the statement itself, though the complex is off worst amid a Pakistan-driven pullback in energy benchmarks.

USTs reached a 108-06 low this morning, but remain clear of 108-01 and 108-00+ from last week; the latter is also the contract low, for reference. Amidst this, the 10yr yield has been up to 4.71%, near-enough matching the YTD peak from last week. A move that is more pronounced the further out the curve you go, with steepening still very much in play, evidenced by the 30yr yield hitting a YTD peak on Wednesday, and eclipsing it this morning at 5.24%, now looking to 2007’s 5.39% high. The 2yr retreated following Warsh, despite knee-jerking higher on the Fed holding, and has since remained around the mid-point of Wednesday’s 4.21-4.39% band.

Heading into the Fed, around a 30% chance of a hike was implied. Now looking to September’s meeting, which will come a few weeks after the Jackson Hole Symposium, the odds of a 25bps hike have increased from around a 55% implied probability to c. 57%, though the main move has been a paring of the odds of it target rate being at 4.00-4.25% (i.e. a July and September hike) to just 1% vs 20% pre-July’s hold; in-fitting with the pullback in short-term rates and curve steepening. Finally, the odds of a September hold now stand at 41% from 24%, as the mentioned 4.00-4.25% pricing reallocates.

Bunds softer, down by 30 ticks as it stands but around 20 ticks clear of the 124.30 base. Broadly, following USTs lower before then finding respite as energy pulled back on the morning’s updates (see Commodities). No move to the morning’s data, with the regional German CPIs in-line with consensus for an uptick in the 13:00BST mainland print, while Q2’s 1st GDP print surpassed expectations at 0.2% Q/Q, benefitting from exports and seemingly indicative of other nations getting hit harder than Germany. Thereafter, the EZ-wide 1st read also surpassed consensus, though once again Ireland may be distorting it.

Gilts in-fitting with the above, are lower by 25 ticks and the same amount clear of the 86.31 trough. Attention today on the BoE, where a hold is expected but the risks are hawkish, and this may be reflected in the number of dissenters ticking up, with Mann the one to watch; full Newsquawk preview available.

JGBs, briefly, were in-fitting overnight, though with additional pressure seen after a soft 2yr tap and as participants now look to the Friday policy announcement.