[MARKET ANALYSIS] Global benchmarks hit after US-Iran talks end without agreement

Global fixed benchmarks are entirely in the red this morning, with energy prices once again surging after the US-Iran peace talks in Pakistan ended without an agreement. Following this, US President Trump said the US Navy will begin the process of blockading any and all ships trying to enter or leave the Strait of Hormuz – this is expected to begin at 15:00 BST / 10:00 EDT.
From an analytic perspective, a US-imposed blockade would essentially remove one of Iran’s greatest points of leverage, therefore giving the US more negotiating power, should further talks take place. On that front, nothing has been scheduled thus far, but with some reports suggesting that the door to a diplomatic solution remains open, and a second round of talks could be held within days.
USTs currently trade lower by a handful of ticks, and are currently trading at the mid-point of a 110-22+ to 111-00 range. European trade has seen US paper edge off worst levels, potentially as traders digest reports of the possibility of further talks, and as the ceasefire remains for now. Geopols aside, US existing home sales for March is due later, with Fed’s Miran also on the docket.
Bunds and Gilts have also been pressured, with some underperformance in Gilts, which are lower by around 50 ticks (vs Bunds -20 ticks). Both, as with USTs, are off worst levels. As above, Gilts and Bunds are moving at the whim of geopolitical developments, given the regions’ net-importer of oil statuses. Homing in on Germany, earlier today, the Merz coalition agreed on measures worth EUR 1.6bln to ease the impact of surging energy prices on the German consumer.
From a yield perspective, the German 2yr has jumped back towards 2.637% (vs Friday close at 2.588%). The 2-year BTP-Bund spread has widened ever so slightly vs Friday’s close, but remains well off the peaks from the heights of the Iran war. Commerzbank’s rate strategist Siemssen said “we would probably need to see a more significant escalation for BTP-Bund spreads to test the March highs again”, adding that “BTPs should also underperform OATs again this week as they are more susceptible to energy prices”.