OPTIONS: Larger FX Option Pipeline

The European short end sold off substantially Wednesday as the US-Iran conflict re-escalated.

• Following recent strikes committed by both the US and Iran, President Trump said that he thinks the Memorandum of Understanding between the two countries is "over" and downplayed the prospects for a deal.
• That saw energy prices jump with front Brent crude jumping back above $80/bbl for the first time since June 22, weighing on EGBs and Gilts.
• Russia's announcement of a ban on diesel exports extended losses for the short end of curves, with 2Y yields closing near session highs.
• Implied ECB and BOE hike pricing leaned to seeing an even call between 1 and 2 25bp increases by year-end (vs closer to 1 fully priced entering the session).
• ECB's Nagel (a hawk) warned about being "back where we started" after the ending of the US-Iran ceasefire.
• On the day, Gilts underperformed Bunds with both the UK and German curves bear flattening. Semi-core/periphery EGB spreads widened, with France, Greece and Italy out ~2bp (10Y vs Bunds) though Spain and Portugal fared slightly better.
• Thursday brings German trade data and the accounts of the ECB's June meeting, while we also hear from ECB's Escriva and BOE's Breeden.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 12.4bps at 2.709%, 5-Yr is up 11.3bps at 2.818%, 10-Yr is up 9.9bps at 3.092%, and 30-Yr is up 6.6bps at 3.641%.
• UK: The 2-Yr yield is up 15.5bps at 4.331%, 5-Yr is up 14.8bps at 4.512%, 10-Yr is up 12.6bps at 4.974%, and 30-Yr is up 10.2bps at 5.691%.
• Italian BTP spread up 3.3bps at 81.6bps / Spanish up 1.3bps at 49.5bps

US President Donald Trump's press conference at the NATO summit in Turkey is underway. LIVESTREAM

• Core rates have extended lows on both sides of the Atlantic amidst continued upward pressure for crude oil futures and products with additional pressure from the Russia diesel exports ban until Jul 31.   
• As with earlier today in response to President Trump’s initial comment about the Iran ceasefire being over, UK rates are most sensitive (SFIH7 currently -0.21) followed by the Eurozone (ERH7 and M7 -0.175).
• Relative insulation for the US to Middle East energy developments continues to see sizeable rates outperformance, with losses led by 2028 contracts (-0.09).
• ECB-dated OIS now sees a close call between 1 or 2 hikes by year-end with 39bp priced vs 26bp late yesterday. July hike odds have climbed from ~1bp to 5bp although there is still reluctance to commit to ECB action in a non-projection meeting – indeed, a September hike is back to being nearly fully priced (24bp).
• There’s still seen as being less rush for the BoE to act, with OIS fully pricing a 25bp hike for November. A second hike is then almost fully priced for Apr 2027 via 36.5bp of cumulative hikes by end-2026.
• Fed Funds futures meanwhile see 8bp of hikes for later this month, 22bp for Sep, 28bp for Oct, 39bp for Dec and close to 50bp of hikes with the Mar 2027 SEP meeting.