THINK Ahead: Bessent versus the bond market
At a Glance
The desk contends that Scott Bessent's recent strategies to manage long-end Treasury yields will struggle against underlying fiscal constraints and congressional gridlock. Despite attempts to implement new buyback programs and engage foreign central banks in repurchase agreements, the U.S. fiscal deficit remains stubbornly high at around 6%. Per the full note by James Smith, Bessent's reliance on short-dated bills to fund these deficits raises further concerns about sustainable borrowing costs across the economy, which traders should monitor closely. Consensus forecasts for EUR/USD show a moderate appreciation trend, aligning with the potential for continued dollar weakness as these fiscal challenges unfold.
Key Takeaways
- 01Bessent's fiscal strategies face significant constraints amid ongoing high U.S. deficits.
- 02Long-term Treasury yields are likely to remain volatile despite new buyback initiatives.
- 03Consensus forecasts reflect expectations for a weaker USD, particularly vs. EUR and GBP.
- 04Upcoming Federal Reserve interactions, particularly from Jackson Hole, could catalyze shifts in market sentiment.
Full Analysis
What the desk is arguing
The desk believes that Bessent's innovative approaches may not suffice to control long-term Treasury yields due to additional economic pressures. The U.S. fiscal deficit remains significant, and as highlighted by Smith, meaningful reduction of this deficit is contingent upon congressional action. Therefore, there is a structural limit to what can be achieved through administrative means alone.
This is particularly relevant ahead of the upcoming discussions at Jackson Hole, where key policy signals may emerge. Recent developments, such as the decision to increase the Treasury buybacks, suggest a tactical shift aiming to bolster borrowing dynamics; however, with the fiscal deficit at 6%, the long-term sustainability of these measures is uncertain.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1634, with projections ranging from 1.1200 to 1.2000 by December 2026. Notably, firms like morganstanley project a target of 1.1600, while commerzbank has a more aggressive outlook at 1.2200. This view aligns with the overall sentiment that suggests a steady inclination towards a weaker USD.
The desk's call aligns closely with broad-based expectations, sitting comfortably within the prevailing targeting range of major firms. However, this suggests an incrementally cautious pace, with some firms projecting towards the higher end of the range, indicating a potential for dollar depreciation.
How other firms see it
Firm consensus on long positions in EUR/USD appears to be gathering steam, particularly among goldman, anz, and hsbc, who each see potential upside towards 1.1800. Conversely, citi remains more skeptical, anticipating weaker performance at around 1.2400 in the same timeframe. This divergence accentuates the existing uncertainty in the FX landscape.
The observed trajectory of USD/JPY will also be crucial as it intersects with both the fiscal maneuvering of the U.S. and the Bank of Japan's policies around foreign reserve accumulation, which could impact currency dynamics profoundly.
Market Implications
Traders should watch for sentiment around the EUR/USD, particularly as it approaches the 1.1700 level which remains critical for a breakout. Additionally, remarks from Fed officials during Jackson Hole may provide fresh insights into future monetary policy direction, impacting FX positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
From the original
Opinions Opinion by James Smith THINK Ahead: Bessent versus the bond market Published 09:37 Bessent's bond market battle has thrust the thorny issue of the US deficit back into the spotlight this week. And in a week when Fed Chair Kevin Warsh takes to the podium in Jackson Hole,
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