Rates Weekly: Higher for longer is back

EUR rates:Recap of the week: EUR rates experienced another significant repricing this week, as the escalating Middle East conflict drove Brent crude above $100/bbl and kept TTF 1M elevated. This energy shock has led markets to price in a more persistent inflation overshoot, with HICP swaps now indicating inflation peaking near 3% in May and remaining elevated into 2027. Consequently, ECB hike expectations have surged, with a July hike fully priced and odds of an April move rising, creating a notable divergence from surveyed economist forecasts.Tactical view: Persistent geopolitical tensions continue to pressure the front end of EUR curve, with markets pricing additional ECB hikes and keeping a bearish bias on duration. While the recent flattening of short forwards appears excessive, creating opportunities for forward steepeners, the broader curve dynamic remains dominated by policy repricing and volatility. Higher yields and a risk-off backdrop argue for caution on peripheral spreads, although Spain continues to outperform OAT and BTP. We maintain a short duration bias with a focus on the front end and favor re-steepening in short-dated forwards (1Y1Y-1Y3Y).Insights of the week:  What would a “stop and go” scenario by the ECB mean for € curves?US rates: We favor scaling into front end longs and steepeners into the FOMC, which we expect to push back on the inflation fearing, bear flattening narrative in the market.