Rates Weekly: Temporary Shock or Not?

EUR rates - Recap of the week: EUR rates remained under strong pressure this week as the escalation of the Middle East conflict led to a renewed surge in energy prices and inflation expectations. The front end led the move, with the 2Y Schatz rising toward 2.60% and markets now pricing around 3 hikes for the ECB in 2026. Curves bear-flattened significantly, with 2s10s compressing toward the low-20bp area. Despite the magnitude of the move, long-end yields remained largerly unchanged, while sovereign spreads widened but remained broadly orderly.Tactical view: The current environment presents a clear tug-of-war between two prevailing narratives. One suggests aligning with market sentiment, assuming the ECB's cautious policy is misguided, and tightening will materialize sooner than signaled, drawing parallels to their perceived lag during the 2022 Ukraine war. The counter-narrative contends that the market, exhibiting a pronounced "stigma" from that past event, is preemptively pricing in an aggressive central bank intervention against the current energy shock, even if it triggers a recession. Given these powerful but contradictory forces, we prefer neutrality across most of the EUR yield curve, as our conviction remains subdued regardless of potential conflict escalation or the belief that the worst might be behind us.US rates: With the war still in escalation mode and not de-escalation mode, the market will be more worried about inflation than growth, and reasonably so given recent history of supply shocks.   In response, we close most of our trades and re-evalaute. Direction is neutral arrow, still like steepeners (why not), spreads up