Rates Spark: US long-end under increasing scrutiny
At a Glance
Lead — US long-end yields face increasing scrutiny as fiscal concerns, resilient economic growth, and energy risks exacerbate bearish steepening trends. Per the full note from ing-think, the market is viewing the impact of Fed Chair Kevin Warsh's speech at Jackson Hole with caution, particularly with the core PCE inflation measure due soon. Current market pricing implies only a 40% chance of a September rate hike, down from over 70% at the start of August. This backdrop creates persistent bearish sentiment towards the long end, impacting key currency pair dynamics, particularly EUR/USD, GBP/USD, and USD/JPY.
Key Takeaways
- 01US long-end yields are under pressure due to fiscal concerns and inflation expectations.
- 02Current market pricing suggests only a 40% chance of a September rate hike.
- 03The bearish steepening theme persists despite support for the front end of the yield curve.
- 04Upcoming core PCE data and Fed Chair Warsh's remarks will be key catalysts.
Full Analysis
What the desk is arguing
The desk's thesis centers on the view that US long-end yields will experience sustained pressure, exacerbated by fiscal concerns and potential tech-related supply. Per the full note, recent increased liquidity operations by the Treasury have highlighted the unsustainable nature of rising debt loads, drawing attention to the need for broader spending cuts, which remain limited without congressional support.
The current focus on inflation, particularly the core PCE data to be released soon, is critical. Recent benign CPI prints have enabled the market to reduce the pricing of rate hikes, which has implications for the front and back ends of the yield curve. The desk suggests that a bearish steepening is likely to continue as underlying fiscal challenges remain unaddressed.
Where it sits in our coverage
For the EUR/USD, the current spot is 1.1679, with a median consensus target of 1.1700 (range: 1.1200–1.2000) for March 2026 highlighted by firms such as anz (1.1609), morganstanley (1.2000), and commerzbank (1.1900). Meanwhile, for GBP/USD, the current spot is 1.3360 and consensus targets also align around 1.3400. The desk's bearish perspective on long-end yields suggests an alignment with commerzbank at 1.3520 for March 2026.
The risks posed by long-end yields and inflation expectations indicate that the desk's view aligns with the higher-end forecasts of several firms but highlights ongoing uncertainty in the fiscal landscape, which could influence broader market dynamics.
How other firms see it
Firms aligned with bearish sentiment include anz and commerzbank, which predict lower EUR/USD and GBP/USD targets, while morganstanley offers more optimistic targets for both pairs. Contrarily, firms like citi and hsbc, which offer more conservative targets for GBP and EUR, suggest a divergence of outlook regarding long-end yield pressures on these currency pairs.
The trajectory of EUR/USD, coupled with Fed responses to inflation, remains vital, especially as expectations around the core PCE measure are in the spotlight ahead of the Fed's strategic discussions at Jackson Hole.
Market Implications
Watch for potential steepening in the US yield curve, particularly if inflation data deviates from expectations. Positions in EUR/USD and GBP/USD may be sensitive to changes in yield dynamics, especially considering the current spot positions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
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Articles Rates Spark: US long-end under increasing scrutiny Published 07:59 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US and EUR long-end yields remain under pressure from fiscal concerns, resilient growth, energy risks and renewed s
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