[MARKET ANALYSIS] Fixed benchmarks pressured on renewed geopolitical tensions; Gilts lag as Rayner and Burnham hold a secret meeting

Global fixed benchmarks are broadly in the red, given the recent surge in energy prices, after Iran shut the Strait of Hormuz over the weekend and fired at three commercial vessels. (Please see the Newsquawk feed for a full geopolitical overview). Now markets await potential second round talks between US-Iran – some reports have suggested both sides will be in the region on Tuesday. As it stands, newsflow on whether the talks will actually take place is mixed; the Iranian Foreign Ministry spokesman suggested that no decision has been made on whether the talks will happen. On the yield front, a clear bear flattening is seen in the curve; a bias which has continued to play out throughout periods of escalation between US-Iran.
JGBs traded with mild gains overnight, bucking the trend seen across peers. Potentially just catching up to the considerable upside seen in fixed benchmarks on Friday (following the opening of the Strait), and also as traders price out the chance of an April hike at the BoJ. Senior rate strategist at SMBC said “the market's main scenario appears to be that a rate hike will be put off next week”, but he highlighted that Ueda could signal a shift in stance at April’s presser.
USTs are off by around 7 ticks, and currently trade at the lower end of a 111-12+ to 111-18 range; but still holding around the mid-point of Friday’s range of 111-04 to 111-23. Essentially, markets have not entirely discounted the strength seen in US paper following Iran’s brief opening of the Strait. The US 2yr remains around 3.75%, which has proven to be a point of support for in the past week. US domestic docket ahead is particularly thin, with no US data/Fed speak scheduled.
Bunds are lower by around 40 ticks, and trading towards the bottom of a 125.66 to 125.89 range. Once again moving at the whim of geopolitical developments/higher energy prices; the GE 2s10s is a touch wider once again, but residing near the lows seen on Friday. Geopols aside, focus has been on the ECB, where a few policymakers spoke over the weekend/late-Friday. Demarco and Kazaks suggested that they were comfortable with bets of two hikes this year, whilst Kocher warned against pre-emptive ECB rate action on uncertainty. Sticking with the ECB, a recent survey of monetary policy experts by the OMFIF suggested that former ECB member de Cos is the “most qualified candidate” in the race to succeed President Lagarde.
Gilts lag vs peers. UK paper has continuously seen bouts of underperformance when oil prices rise, given its high dependence on external energy. But also adding to the downbeat narrative is domestic politics, with continued focus on PM Starmer’s future. The Sun reported that Manchester Mayor Burnham met with Former Deputy PM Rayner on Friday, which has fuelled rumours of the pair launching a leadership challenge. Gilts currently trade down by around 66 ticks and at the lower end of a 88.44 to 88.72 range.