[MARKET ANALYSIS] Gilts unreactive as former Defence Secretary Healey is selected as Chancellor

Global fixed income benchmarks trade range-bound, in line with energy prices, despite the risk-on tone seen across the equity space. Equities seem to enjoy the reporting around a possible 10-day ceasefire, with recent reporting hinting that the US is demanding a longer ceasefire. Gilts (+9 ticks) trade higher, despite the announcement of former Defence Secretary Healey as Chancellor. Thus far, gilts have taken this as fairly positive, possibly taking comfort in the fact that he used to work in the Treasury in past governments. In terms of Burnham's policy, Bloomberg reported that the UK government will remove VAT on electricity bills from October 1st, funded by cancellation of the Digital ID programme. There have been contradictory reports over whether this measure will be fully funded. The Times reported that this will be fully funded; however, the OBR said the GBP 1.8bln figure for the ID scheme was unfunded, while former UK minister Jones suggested that Burnham's cut is also unfunded. More recently, the Huffington Post reported that Burnham is to slash business rates for the hospitality sector by 20%, while a GBP 2 cap on bus fares is also set to be unveiled soon. On the data front, the ONS released its May employment report; employment change 147k (exp. 85k, prev. 100k), unemployment change 4.9% (exp. 4.9%, prev. 4.9%). Despite the strong labour report, gilts have failed to react, given the focus on politics. Bunds (-4 ticks) rotate in a 124.59-124.81 range. Focusing on the short-end, the yield currently trades outside of the 2.52-2.76% range, driven by the recent leg higher in energy prices. Brent has recently returned above the USD 90/bbl mark, resurfacing worries of an energy pass-through into inflation. ING says that rates can take a hawkish view, with the 2yr euro swap rate touching 3%, because the EZ growth picture continues to recover. Additionally, implied bond volatility is at lower levels, compared to the early stages of the Middle East conflict. USTs (+2+ ticks) lack direction given the quiet docket this week, heading into the Fed policy announcement next week.