SECURITY: Little Change In Tone: Summary Of Trump Comments On Iran (1/2)

Gilt futures trade to the highest levels of the day alongside the aforenoted stabilisation/recovery in Tsys, with little in the way of meaningful headline drivers apparent.

• Futures haven’t quite closed the opening gap lower (91.61), topping out at 91.55 so far.
• Yields now 1bp lower to 1bp higher on the day, modest twist steepening seen after more pronounced bear steepening early in the day. Cycle closing highs in 2s10s and 5s30s remain unchallenged.
• Outright yields as much as 9bp off session highs at typing.
• 10s are now ~1bp tighter vs. U.S. peers on the day after being ~3bp tighter at one stage, as the sell USD asset theme moderates from session extremes
• UK headline flow remains limited.
• BoE-dated OIS essentially flat on the day after the recovery in the long end, 1bp of cuts priced for June, 16.5bp through August, 23bp through September, 35.5bp through November and 42bp through year-end.
• SONIA futures +0.5 to -3.0, last week’s lows intact.
• Comments from BoE hawkish dissenter and chief economist Pill are due tomorrow.
• A reminder that he previously noted that he will flesh out the thoughts that drove his hawkish dissent at that event.
• UK CPI data, due Wednesday, headlines this week’s UK data calendar.

The centre-right AD-PSD/CDS Coalition of PM Luis Montenegro has, in line with expectations, emerged as the largest party following the 18 May legislative election. With four of the 230 seats in the Assembly of the Republic still to be declared, the AD has won 89, up nine from the previous election in March 2024. Sitting short of the 116 seats required for a majority, the AD will either have to form a coalition or rely on support in a confidence and supply agreement from either the centre-left Socialist Party (58 seats, down 20) or the far-right nationalist Chega (also 58 seats, up eight). The alternative is that the AD governs as a minority administration relying on outside support on a bill-by-bill basis, making for an unstable political environment. 

• The 58 seats won by the PS (so far) is set to be the worst return of seats for the party, since 1985 when the party won just 57 seats. PS leader Pedro Nuno Santos has confirmed that a leadership contest will be called, and that he will not be a candidate.
• For Chega, the result marks the party's best-ever performance. The health travails of leader Andre Ventura did not dissuade voters, and there is an increasingly vocal grounswell on the right of the AD calling for the end to the cordon sanitaire around Chega.
• Montenegro has previously ruled out working with Chega. Having increased his party's seat total, pre-election speculation that the PM could be moved on to allow for another leader more inclined to work with Chega is likely to evaporate. 

Chart 1. Legislative Election Results 2024 vs 2025 (Partial), Seats

Source: Ministry of Internal Administration, MNI. N.b. Four seats yet to be declared. 

• Treasuries have continued the move off session lows after breaches of 4.5% for 10Y and especially 5.0% for 30Y yields proved attractive.
• A recovery in EGBs with today’s heavy supply starting to be digested has also likely helped at the margin.
• Pertinent cash yields: 10Y at 4.493% off a session high of 4.562%; 30Y at 4.969% off 5.035% for fresh highs since Nov 2023.
• TYM5 at 110-02+ is now a few ticks above where it briefly hit in yesterday’s late trading after the Moody’s headlines landed, and starts to close in on the 110-10 pre-headlines.
• It’s via today’s low of 109-20, one that didn’t test support at 109-18+ (May 15 low), after which lies a key 109-08 (Apr 11 low).
• We earlier noted how bank's risk-weighted capital asset calculations shouldn't be materially impacted following changes in prior episodes. It does however help build on long-end angst seen in particular since early April and Atlanta Fed’s Bostic for instance noted: “With that downgrade, it will have implications for the cost of capital and a bunch of other things, and so it could have a ripple through the economy,”
• The day’s sole data saw the Conf. Board’s leading index with its sharpest monthly decline since March 2023 although its six-month measure avoided triggering a recession signal.
• The Trump-Putin call is underway.
• We’re still to hear from Logan and Kashkari (’26 voters) later at 1315/1330ET, likely to match broader Fed rhetoric of pushing cuts further out this year (see above), before a thin docket tomorrow.