Short-lived relief rally
A tantrum in the bond market has continued to erode away at risk conditions in recent sessions. In the UK, the sell-off in gilts and corporate bonds has been particularly acute thanks to heightened political instability, the origins of which we have covered thoroughly in recent briefings. Yesterday, headlines delivered enough optimism to at least temporarily reverse that trend. Those headlines included a US decision to call off a previously planned military strike, albeit at the request of regional allies. In the UK also, by-election and PM hopeful Andy Burnham was reportedly minded not to change the UK’s fiscal limits if successful in his bid for PM.
It’s important to appreciate that the shape of the yield curve hasn’t changed over the past couple of weeks. Amongst most major western economies, the shape of the yield curve changed fundamentally after the US/Iran conflict began and has been steepening/flattening based largely upon the developments within that conflict as well as idiosyncratic domestic events. The new shape of such curves is concave, reversing earlier beliefs prior to the conflict in the Middle East that a calming of inflationary pressures would lead to central banks being able to continue to cut rates.
The prospect of higher yields amongst FX has not attracted investors away from the Dollar. Defensive positioning has left many currencies, including Sterling, testing recent support levels as investors reduce exposure to the economy. With speakers from the BoE and ECB in the coming days and, more importantly, the publication of Fed minutes tomorrow evening, the bond market will remain on tenter hooks as the week progresses. Despite a reading in-line with expectations for UK wage data this morning, Sterling has lost much of the bid it received into the European close yesterday.
Discussion and Analysis by Charles Porter
Related Insights
Daily Brief – Defiance
Charles Porter
Tue 12 May 2026
Defiance Yesterday’s market was defying one of two things: logic or gravity. Come to think of it, perhaps both. Take cable, GBPUSD, yesterday. The key events beyond minor data releases centred around any chatter from either side of the Iranian conflict and Starmer singing for his supper. Sing he did and tweet the President did, […]
Daily Brief – Room to manoeuvre
Charles Porter
Tue 26 May 2026
Room to manoeuvre Kevin Warsh was sworn into office at the White House on Friday. Despite limited market movement on Friday, many prices gapped significantly come the open yesterday. Whilst the UK and US observed a bank holiday yesterday, many indices and currencies were on the move. The theme across the market was risk on […]
Daily Brief – An outside chance
Charles Porter
Thu 28 May 2026
An outside chance Sterling has amassed one of the largest net short positions in its recent history. By that I mean that, within the options space and based upon the disclosed commitments of traders, the number of participants positioned to benefit from Sterling’s decline towers over those expecting a rally in GBP by a record […]
