Fixed Income contagion risks
The current surge in fixed income yields poses significant contagion risks to broader financial markets, particularly FX, as highlighted by MUFG EMEA’s insights. Derek Halpenny notes that fast money accounts are nursing substantial losses, creating a heightened urgency to liquidate profitable positions to offset these damages, thereby increasing selling pressure across asset classes. As yields rose considerably, markets are left to grapple with the ramifications of this sell-off and its spillover effects. The desk believes that sustained volatility in fixed income could lead to an eventual risk-off sentiment that will manifest prominently in currency movements.
What the desk is arguing
The heightening sell-off in fixed income assets is creating substantial risks of contagion for the FX market as traders look to hedge losses. Per the full note from MUFG, the rapid increase in yields has led to liquidity pressures among market participants, prompting them to sell profitable exposures to cushion losses elsewhere.
Reports indicate that fast money accounts are already experiencing notable losses, with yield spikes of around 50 basis points over the previous weeks. Such significant moves could enforce a broader risk-off narrative, particularly as traders may seek to lock in profits from other asset classes amidst rising bond yields.
Where it sits in our coverage
While our internal coverage data does not directly reference specific currency pairs, consensus views in the market are reflecting various expectations. Notably, notable targets include: - jpmorgan: 1.10 for Mar-26 - bofa: 1.04 for Mar-26
Current market sentiment appears aligned with an expectation of continued upward pressure on yields but diverges on the magnitude of potential FX impacts, with jpmorgan targeting a higher level compared to bofa’s conservative stance.
How other firms see it
There appears to be alignment among firms such as jpmorgan and others in anticipating that heightened volatility in the fixed income space could spill over into the FX markets. Conversely, bofa seems more skeptical regarding significant movement, underscoring contrasting views on risk appetite.
Traders should keep an eye on the EUR/USD trajectory as it often mirrors the developments in fixed income trading. Additionally, watch for indications of how central bank policy responses may evolve in reaction to rising yields.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A rapid rise in fixed income yields could initiate broad contagion risks in the FX markets.
- 02Fast money accounts are facing substantial losses, prompting selling to offset damages.
- 03Current sentiment varies significantly among firms regarding the anticipated impacts on FX.
- 04Traders should monitor the EUR/USD for potential spillover effects.
Market implications
Traders should watch for potential levels at which the FX market may react, particularly observing the EUR/USD movements. The ongoing volatility in fixed income should lead to increased sensitivity in currency trading, especially as risk sentiments shift.
Risks to this view
The primary risk to this thesis would be a surprise dovish pivot from central banks or a stabilizing economic report suggesting resilience. Such catalysts could prompt a reassessment of current yield trajectories, altering the risk outlook significantly.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpeny, Head of Research Global Markets EMEA and International Securities. It's Friday 25th September 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Simon Mays, Head of UK, Ireland and Swiss FX Corporate Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Derek, really good to catch up again after what's been a very busy and interesting week once again.
Yes, indeed. We kind of say that every time. Well, it seems like on a day-to-day basis that the news that I've been reading has been focused very heavily on the selling in fixed income this week.
So that's something I wanted to kick off with. So what's your sort of view on the scale of the rise in yields that we've seen? And I guess that the risk of it spreading to general risk appetite and to FX?
Yeah, no, definitely. Like the scale of the move is pretty significant. Definitely heard of kind of fast money type accounts suffering big losses this week and over recent weeks.
And I think, you know, if that's true, that certainly raises risks of contagion beyond fixed income into broader markets. You know, the obvious contagion catalyst being if there's big losses being nursed by these accounts, there's obviously a need to kind of try and alleviate those losses. And if you've got profitable positions, then there's a bigger incentive to lock profits in and compensate for some of the losses.
And that results in selling in profitable areas. You know, the scale of the move, like I've gone back to kind of the beginning of this latest phase of fixed income selling. So, you know, the two year yield since Jackson Hole basically is up 72 basis points.
So that's a 21 day period. And essentially, looking back through history, that is the biggest 21 day jump in the two year yield since March 2023. So I looked back at that.
And this basically was the run into the US regional banking crisis kicking off. So just after we peaked out, news of Silicon Valley Bank collapsing, Signature Bank soon afterwards. And after that jump over that 21 day period, which was about 75 basis points, we then had the biggest two day drop in the two year yield, nearly 90 basis points since Black Monday in 1987.
So the point here is, you know, not necessarily that we're about to see a banking crisis, but that these kind of fixed income moves do have consequences. And the risks are definitely higher that there could be some kind of risk event around the corner, certainly if we don't see any kind of notable retracement lower like obviously yields are a little bit lower today. But, you know, if we stay at these elevated levels, or obviously, if we move further higher, then I think the risks certainly start to increase quite notably.
And then I guess I'm going back to what I said about, you know, profitable areas, you know, what could be vulnerable, obviously, in equity space, you have to conclude AI is where the risks are, that's where the returns have been huge. So if there's an incentive to lock in attractive returns, and over a relatively short period, like I looked at just the last three months, the MAG7 is up 20% relative to 5% for the S&P overall. So relative to the overall equity market performance, there's been a big, big move.
So, you know, AI, MAG7, hyperscalers, they could certainly be more vulnerable. And obviously, we had the Oracle news this week of the force majeure. So concerns about data center delays, which is a reflection of the growing opposition amongst US households to data centers, the risks in relation to that, you know, this may be nothing, but certainly, the trickle of news, you know, there's been obviously calls for guardrails to slow the pace of AI investments.
And on top of all that, you have this big move in rates. So there's definitely risks there. So from an effects point of view, then, obviously, for the reasons you've already mentioned, you know, dollars benefited, you know, well, so far this week, there's a couple of currencies to look at dollar yen, first of all, you know, reaching higher again, knocking on that 160 once again, until overnight, the comments from Katayama.
How much of a risk do you think there is dollar yen breaking higher substantially again? Or do you think they've got to keep it on top of it just about with this verbal intervention? Well, the interesting thing about the yen is like the yen is the best performer today, on the back of these comments that you've mentioned, and it's not just Katayama who spoke this morning, saying that Trump had expressed concerns.
But she's also spoken just now, not so long before we've come in here. And she has been, you know, she was pretty clear. Prime Minister Takeuchi is not a reflationist, we will act again in the FX markets if required.
And what I feel is happening here is that there's, there's a more concerted effort that does coincide with this perception of a tighter relationship with Washington, in terms of coordinating FX, obviously, going back to the joint intervention, even though it was kind of symbolic. But nonetheless, they want to push this perception of a joint effort. And we had the checking of rates reported by the Nikkei last week.
So it's becoming a bit more persistent. And I think we're beginning to get some greater sensitivity to that in Dolly Yen. We've just published a new publication, and you can find it on the website, FX Quant, and we, my colleague, my quant analyst colleague, Abdullah Had, he kind of focused on, is there a turning point here, and he looked at different metrics, and the more structural metrics do indicate conditions are changing.
So it could be the start of a more sustained turnaround. But tying this into what I was saying a moment ago, obviously, from a risk perspective, what's been profitable in FX that could be realized to offset losses and fixed income, obviously, FX carry has been a hugely profitable trading strategy. So you'd include short Yen in that.
But also, I think LATAM, very attractive carry in a lot of LATAM currencies. I think there's definitely vulnerabilities for MEX, which has come under pressure this week. Chilean peso, Brazilian Royal has held in better, but still vulnerabilities there.
So you could get, and vol is picking up in emerging market FX. It's obviously picked up in Dolly Yen as well. And that's a recipe for also encouraging liquidation of carry.
So risks are definitely much more elevated that this volatility in fixed income could start to spread. Yeah, and lots to keep an eye on going into next week, then. And on that point, it's quite an important week next week in regards to macro news data, Fed policy expectations, obviously, a lot of people are looking into that at the moment.
So what do you see as the main, or the key events next week? I guess the jobs report is probably going to be the main focus. Yeah, as usual, we're kind of coming into the month ahead.
So the turn of the month, payrolls is definitely going to be the key one on Friday. As we saw last month, it's not as important to CPI. We had quite a strong print, 162,000 last month, but the market's kind of really held back from a big reaction until we had the CPI.
And then markets definitely became more convinced on a September FOMC rate hike. The consensus is 100k, so that's down from 162. The 12 month average is 50k.
Six month average is a little over 100. Three month average is 71k. So 100 would be certainly a decent print relative to 162, you know, combining the two months together.
So I guess the wage figures are important. There's a slight uptick in terms of the consensus print there and the unemployment rate is suspected to remain at 4.1%. I think if we get a broad consensus print, that's not going to be enough to see a retracement in yields.
I think it'll keep the markets thinking the Fed is in play, given the communications that we've had. Obviously, we'll need to wait until the CPI comes, but I think you probably need to get something close-ish to zero, or obviously below, to get a potential bigger retracement in yields lower. And even before that print, we will have a better sense of what the consensus will be.
It might change a little bit because we have the AGP, we have the JOLs, we've got the ISM manufacturing the day before. So the usual kind of array of data. But yeah, I think given the momentum that we've had in recent weeks, it would probably take fairly weak data to convince the markets that the Fed could rethink the recent actions and rhetoric.
From a central bank point of view, next week, anything to look at? I think RBA meeting next week? Yeah, final meeting in the G10 space after every G10 central bank met.
RBA certainly looks like they're going to hike. It's nearly fully priced, it's 90% priced. We had a fairly hawkish speech from Governor Bullock last Friday, where she was clearly expressing concerns about the building inflation risks.
And we had a decent enough jobs print, the unemployment rate ticked higher, but just certainly not enough to alter that. The question is whether it's one undone, one more undone, because obviously the RBA have been hiking already. Getting to 4.6%, which is where the policy rate would get to, that's certainly in the restrictive territory.
But given her tone in the speech last week, obviously if energy prices and global risks continue to point towards inflation risks, there's a decent chance that she'll certainly leave open the prospect of another move. Should be fairly supportive for us. But again, going back to what we're talking about, if you're going to be talking about carry liquidation in the G10 space, Aussie would certainly suffer if we didn't start to see that.
Got it. Plenty more for us to get our teeth into next week, clearly. Okay, thank you very much for your time.
It's been great to catch up. Thanks, Arnold. Cheers.
Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe. Contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team.
Sources & References
How we cover this story