[MARKET ANALYSIS] Fixed benchmarks lower as VP Vance cancels his Switzerland trip and continued strikes in Lebanon

Fixed benchmarks posted very mild losses in overnight trade and then extended on declines after US VP Vance cancelled his trip to Switzerland. Reports overnight suggested that one reason for the postponement was due to the Iranian’s demands regarding the situation in Lebanon. It remains a tumultuous environment, with strikes within the region continuing, with Israel essentially rejecting the Lebanon-related clause from within the Islamabad MoU.
Today’s action appears to be reflecting the mild upward bias seen in the energy space, and in a slight reversal of the flattener trade seen in the past couple of sessions. Today, there is a steepening with mild outperformance in the belly of the curve (Bunds and Gilts).
UST futures are off by a handful of ticks and trade within a 109-12+ to 109-20+ range. Do note that there is no cash trade today, given the Juneteenth holiday.
Bunds (-40 ticks) are lower this morning, given the energy dynamics. Elsewhere, the USTR announced that it had started a Section 301 probe of Germany regarding pharmaceuticals, to determine whether persistent underpayment for innovative pharmaceutical products by Germany is unreasonable or discriminatory. By the end of the probe, if Germany is seen as guilty for underpaying, then the US could impose tariffs on Europe’s largest economy. For reference, the US could target any sector, including German autos or electronics
Gilts (-70 ticks) underperform vs peers, hampered by a) energy developments and b) domestic politics. On the latter point, Burnham convincingly won in the Makerfield by-election. Burnham is now firmly on course to become PM. The process for that is still up in the air. PM Starmer could schedule his own exit or contest any leadership challenge launched by Burnham. Burnham is left of Starmer on the political spectrum, and his premiership would add 7-14bps of additional political premia to the UK 10yr yield, according to Pantheon Macroeconomics; on that, we remain attentive to his Chancellor selection, reports suggest Ed Miliband is the frontrunner. An appointment that could enhance the soft-left assessment of and reaction to a Burnham government.