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G10 fixed income views may be best expressed on a relative basis given the increased co-movement of bond yields since the onset of the Iran war. The global nature of the inflationary shock has prompted central banks to pivot to a near-universal more vigilant stance. Although prospects for a near-term US-Iran ceasefire agreement have returned to the fore this afternoon, outright duration plays should be appropriately hedged with positions that are correlated to energy prices given the still-elevated uncertainty.

• The chart pack below highlights that movements in G10 10-year yields have been increasingly explained by the first principal component (PC1) in recent months – both on a standardized levels and standardized daily changes basis.
• The analysis indicates that PC1 has explained over 80% of the variation in standardized G10 yield levels over the past 90-days, and just over 50% of the variation in standardized daily changes. These proportions are not necessarily outliers on a historical basis, but the speed of adjustment in recent weeks is nonetheless notable.
• Looking at the analysis on standardized levels, a regression of PC1 on the first Brent crude future has an R-squared of ~70%.
• If/when a US-Iran agreement is reached, market focus will shift the actual impact of the war on individual economies, and by extension their respective monetary/fiscal policy and political outlooks. This should lead to a larger divergence of outcomes in G10 yield curves.

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