Global Rates: Dissecting the sell-off in European rates, next week’s BoE meeting

The recent sell-off in European rates stems primarily from Middle East-driven energy price volatility, compounded by positioning washouts and hawkish ECB projections. While front-end markets price in significant cumulative hikes, current valuations appear stretched, though persistent energy price uncertainty makes tactical resistance difficult. Intermediate yields have risen due to a lack of money market curve flattening, elevated beta to U.S. rates, and CTA selling activity, rather than fiscal concerns. Meanwhile, the Bank of England is expected to hold rates steady at its upcoming meeting, as second-round wage pressures remain unconfirmed despite rising energy costs. Intra-EMU spreads have widened amid geopolitical uncertainty and technical positioning, though current levels lack sufficient cushion against further volatility. Additionally, the risk of a CTD switch in Buxl futures has increased, though short basis positions remain unattractive due to broader market uncertainty.