Hawkish Bias Remains Strong Despite Easing Yields

The European Central Bank's hawkish bias remains strong despite some easing in Bund yields compared to last week. The main driver of euro rates is still oil, and with hopes that the Strait of Hormuz will reopen, Brent prices have pushed below $80/bbl. However, even at these lower prices, oil stays elevated for longer, mounting the risk of second-round inflation effects.

This keeps central bank pricing hawkish, allowing the ECB to maintain a hawkish narrative without risking too much economic drag. A September hike is now priced in at more than 80%, and public pushback from ECB officials seems limited. If oil prices fall further, markets may no longer price in a second rate hike, but this would require inflation data to come in below expectations.

Meanwhile, global optimism is supporting higher 10Y rates as the S&P 500 hits new records on solid earnings announcements. The positive sentiment is also reflected in the VIX, which is close to this year's low despite looming geopolitical uncertainty.