Rates Weekly: Risk management mode activated

EUR rates - Recap of the week: Markets continued to trade on the assumption that the ECB will respond proactively to the latest energy‑driven inflation shock. Beyond one year, EUR HICP inflation forwards are now back at target and expected to stay there, signaling strong confidence in central banks’ ability to deliver 2% inflation even at the cost of weaker growth. Real yields are therefore in the driving seat. The 10Y Bund has reached 3.10%, broadly in line with our year‑end target, swap curve flattening has intensified (2s10s below 20bp, 10s30s slightly inverted), and peripheral spreads have underperformed in a volatility‑driven, risk‑off environment rather than on renewed idiosyncratic fears.Tactical view:  Market volatility driven by the Middle East conflict suggest a focus on the direction rather than the magnitude of moves, with oil prices, front-end rates and inflation expectations now dominating yield-curve dynamics. Expect a credibility-over-optimality bias from the ECB and consider a contrarian long position on the front end. Still favor yield-curve flatteners despite negative carry, betting that persistent volatility and either further hikes or rising recession risk will compress term spreads. In credit, BTP spread widening as Italy’s weak fundamentals and higher fiscal risk are repriced, preferring Bunds and, in a less volatile expression, French OATs over Italian risk.Insights of the week: Fair value vs market Pricing: A controlled overshoot driven by policy uncertaintyUS rates: We have previously discussed how capital demand from the AI buildout and higher productivity could keep real rates elevated.   Now, we discuss if the Iran War may cause the same effect through shifts on the supply side.