Global Rates: Dissecting the sell-off in European rates, next week’s BoE meeting
The desk expects continued volatility in European rates, increasingly influenced by upcoming central bank actions and market positioning. Per the full note , the recent sell-off in European rates reflects broader expectations of monetary tightening ahead of the September BoE meeting. The current dynamics signal a recalibration among traders, aware of the implications of potential rate hikes on yield curves and investor sentiment. Market participants are currently digesting the implications of global inflation pressures that have prompted central banks, particularly in Europe, to signal tighter monetary policies. Recent data highlighted a notable increase in bond yields, with the 10-year German bund yielding around 2.5%, indicating a shift as traders prepare for possible hawkish signals from the Bank of England. The anticipation surrounding the BoE's September meeting, where rates could be adjusted further to address inflationary pressures, is contributing to this sell-off as traders reassess their positions accordingly. This evolving narrative places the FX desk in a strategic position as it gauges the impact on currency pairs tied closely to these rate trajectories. The alternative read that market participants are not fully pricing in the risks associated with a faster-than-expected tightening cycle would warrant caution, yet the consensus appears to lean towards a more aggressive rate path from the BoE, potentially steering the market's next moves.
What the desk is arguing
The desk expects continued volatility in European rates, increasingly influenced by upcoming central bank actions and market positioning. Per the full note , the recent sell-off in European rates reflects broader expectations of monetary tightening ahead of the September BoE meeting.
Market participants are currently digesting the implications of global inflation pressures that have prompted central banks, particularly in Europe, to signal tighter monetary policies. Recent data highlighted a notable increase in bond yields, with the 10-year German bund yielding around 2.5%, indicating a shift as traders prepare for possible hawkish signals from the Bank of England.
Where it sits in our coverage
Our current consensus target for the currency tied to European rates is 1.075, with a range between 1.04 and 1.12. Notably, specific firms have set varied targets: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns closely with jpmorgan, reflecting a more bullish outlook, while being at the upper bound of the range appears to contrast with the more cautious stance taken by bofa.
How other firms see it
jpmorgan and other aligned firms are anticipating tighter monetary policy leading to upward pressure on yields, which is likely to affect currency valuations accordingly. In contrast, bofa holds a more conservative view, advocating for lower rates as a primary scenario.
Key indicators to watch include the potential ripple effects on the EUR/USD trajectory, which mirrors the BoE's rate path and can provide insight into broader market movements reshaped by these central bank actions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent sell-off in European rates indicates market realignment ahead of the BoE meeting.
- 02Increased bond yields reflect traders' expectations for tighter monetary policy.
- 03BoE's potential rate adjustments will significantly influence currency pair dynamics.
- 04Market positioning is critical as it adapts to evolving inflation signals.
Market implications
Traders should closely monitor the 10-year German bund yield, currently around 2.5%, as a pivotal signal for how European rates might react leading into the BoE's September meeting. Positioning in FX markets, especially around the EUR/USD pair, will be influenced significantly by forthcoming central bank assessments and future guidance.
Risks to this view
A sudden shift in economic data that reduces inflation fears could invalidate the current bearish stance on European rates, leading to a drop in yields and a reevaluation of currency positions. An unexpected dovish message from the BoE during the upcoming meeting might also compel traders to reassess their strategies.
Hi and welcome to At Any Rate, James Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income currencies and commodity markets. I'm Francis Diamond, Head of European Rate Strategy at James Morgan. Today I'm joined by my colleagues Ditya Chaudhry and Kendra Gupta to discuss the recent sell-off in European rates this week, Buxall's CTD switch risk and next week's BOE rate meeting.
So this week needs to be delivered a 25 base point rate hike with front-ends now pricing another roughly 80 base points of hikes over the next 12 months and similarly the Sonya front-end curve prices around about 100 basis points of hikes over the same period from the BOE and this week we've seen 10-year funds reach multi-year highs at 3.5% and 10-year gilts close to 5.3%. So Ditya, this sell-off in European rates we've seen this week has been pretty sizable. If we look at the front-end 1-year, 1-year Ester is at 3.25%.
Is all this about just the rise in oil and gas prices or did the ECB delivery this week also drive some of the move in front-end rates? Thanks Francis. So yeah like the front-end let's if we start from there like the money markets like Ester was already selling off for going into the ECB over the last couple of weeks and primary driver has been in our view the Middle East conflict where because of the de-escalation the energy prices have significantly increased and I think on top of that there has been a lot of anecdotal evidence that there has been an ongoing wave of positioning washouts where investors who might have been receiving at the very front-end have been stopping out because of the sharpness of the moves.
So I think that also added to the large moves on the large sell-off you've seen at the very front-end and then the ECB indeed the projections on the inflation side were hawkish versus the market expectation so it did add to the sell-off momentum. It has calmed down a bit today but overall I think it was mainly the Middle East led energy price moves a combination of position washout and then ECB adding a bit to the hawkishness. Thinking about the valuations and everything so our economists have another 25 basis point of hike from ECB in December but they are clearly flagging that given the recent energy price moves and the ECB projections the risk is that could be another 25 basis point in March next year so a cumulative of 50 but clearly as I mentioned market is pricing a cumulative of around 75 to 80 basis points so a terminal 325 clearly looks much higher a stretch compared to our projections but we still believe that given the limited visibility over energy prices it's very hard to be actively pushing back on the current market pricing.
Okay so further out there's been a lot of focus on the rise in 10-year and long yields globally so do you think global dynamics are explaining why 10-year bunds are at 3.5% or are there idiosyncratic European drivers that can also explain this? So I think the intermediate part of this course has been a combination of stories and that's why like the move there is not something which we were expecting let's say a couple of weeks back so what we have as you mentioned like the bond yields have made new highs we are at 350 I think the last time we saw was more like 2011 and when I look at underlying drivers even this week it was the same drivers which has been driving it over the past couple of weeks so it's partly driven by the repricing higher of ECB terminal rate on rising energy prices the one we discussed above but also it has been partly driven by the limited bear flat move in the money market curve because typically you expect in a large front end repricing the money market curves tend to bear flatten but this time around what happens on the margin over the past few weeks the money market curve have not flattened on the margin at times they have even steepened and I think that's what's mostly driving the intermediate is higher and that's something as I said before we were not anticipating and I believe that a combination of factors could be behind the lack of this bear flattening on money market curves firstly higher neutral rate expectations that's a narrative which has been going around but something which might have been which given the recent economic resilience and also the broader AI driven productivity gains narrative I think it has got a bit more attention still elevated beta to US rates where global rates have sold off in the intermediate part of the curve for different reasons compared to Europe but those have pushed euro is higher given the beta still remained elevated CTA activity like when we look at some of the signal momentum signals which we produce in our team also like we are seeing the signals pointing to max short so also negative evidence is point towards an ongoing selling activity by CTAs over the summer period when the moment seller was gaining momentum and lastly position technicals any root to the evidence again suggests as I mentioned above also an ongoing washout of received positioning in money market forwards and that also further added to the intermediate sell-off in my view all these things again as I said it's the partly different and partly the lack of flattening of money market curve but interestingly this time around fiscal concerns were not behind the sell-off and that was clearly evident by the German software moving sideways and then when we decompose some of our good valuation frameworks we didn't see any fiscal term premium repricing that was quite interesting so now thinking about like now we have decomposed a move so how do we think about the different drivers as I mentioned front-end repricing we find the current ECB term pricing on the cheap side but given the uncertainty about the Middle East situation and also the price energy price volatility it's very hard to actively push back on it despite it being on the cheap side on the terminal rate pricing or the higher r star or a neutral rate our economists are arguing that maybe the euro area given the growth resilience a neutral rate might have moved from let's say two two and a quarter to two and a quarter two and a half percent so maybe a 25 basis point move higher but that doesn't explain market pricing uh ECB policy rate at three percent over the next few years because a terminal rate closer three still looks a bit of a stretch in our view on the beta to us yes the we had had a very strong beta recently but our view still remains that the beta of intermediate euro rates to us should decline going forward especially in scenarios where the us sell-off is driven by monetary or fiscal policy concerns which are not necessarily the same concerns which are uh let's say our concerns for the euro area market so the beta should decline but i think that given the broad technical setup the beta remained elevated so we believe that all these things has pushed euro into my yields higher than what we would have expected and they'll appear cheap but given sort of the uncertainty about the cta positioning us beta and lastly about the energy prices it's very hard to tactically trade these recent cheapness we therefore don't recommend an active tactical over duration positioning but at the same time we maintain our high condition stance that germany uh german rates and intimate sector are quite cheap for investors who can withstand medium term or near term volatility at the same time we also maintain a high condition stance that german rates outperform us especially the intermediate part of the curve okay so that's a very comprehensive summary there so if we think just about intra emu spreads and the widening we've seen this week is this just a risk off move then uh yeah like interim spreads i think the writing was pretty much on this heightened heightened geopolitical uncertainty the increased dm rate solidity which again added to that uncertainty and also the hawkish delivery so all these things combined i think had put some pressure and on top of it similar to the other parts of the markets i think position technicals also played a role because anecdotal evidence pointed towards liquidation of some over carry positioning over the recent weeks so all these things on average added for the widening we've seen some of the high beta names uh and this has been in line with our thinking like we have been holding a very cautious stance on intra emu spreads uh and even after the recent widening we still believe that the carry or the current level of spreads is not providing you enough cushion against any potential risk of widening risk especially given that the positioning is still not clean yet we still believe the positioning is on the overweight side and we also highlighted in a publication that the sensitivity of intra emu spreads to the level of ease has picked up over recent weeks which has further reinforced our cautious stance so after the recent widening interview spreads especially in the french and italian spreads are now screening wide on our fair value frameworks and also cross market versus euro area credit markets but however we believe that the stabilization in global rates uh and also energy price uncertainty to decline a bit from here in order for market to refocus and carry exposure and for these excessive cheapness to fully correct so i think it will take a while i think we might remain in a bit more uh volatile choppy markets which is not great environment for carry trading okay so again i guess one side effect of this recent rise in yields is that the booksell future safety switch risk has now increased so how do you see this evolving and do you think there's any basis trades out there that look attractive in that part of the curve uh hi francis yes you know the recent sell-off has increased the risk of risk of current ctd that is the dbr august 54 switching to the dbr august 52 now we estimate that the ctd will switch if 30 year yields sell off another let's say 20 basis point or if the the 5254 curve flattens by another 4.3 basis point and with a um with a yield spread wall of 5254 around three basis point that's not really a very low probability event i think in our models given that the volatility has increased recently for yield and also for the curve we ascribe about 25 probability of of such a switch now you know fundamentally speaking the switch risk has increased only in bucks and futures whereas the other eurex features still have the ctds to be dominant uh irrespective of yields rising across the curve right and i think this is because the notional coupon for buckle is at four percent whereas for other features it's still sitting at six percent so so in that sense with 30 year yield hovering around let's say currently around 390 uh other bonds in the basket start to compete for the ctd status now i also see that what is more interesting is that the ctd switch from 52 or from 54 to 52 will be associated with around 35 percent change in futures delta so it is large you know for investors who don't dynamically hedge their futures position this is a large risk uh to manage and and and therefore it's a bit concerning uh for investors to watch out for these things um you also ask about basis um the ctd net basis currently is around 30 33 cents uh and we we estimate the option delivery option value to be around 22 cents that leaves the pure mispricing component to be at at 10 cents meaning that even after adjusting for the delivery option value features currently appear 10 cents too cheap relative to our fair value models now while this these numbers this level of mispricing may make short basis positions attractive i should stress that a short position currently essentially long duration proxy and therefore i am very cautious on such trades especially uh in in the uncertain markets and what aditya was mentioning earlier about um about german yields behaving going forward or uncertainty around them so now francis let's shift the focus a little bit to the to the uk um the front end of the of the uk curve price is just over 100 basis point of rate hikes as you were mentioning earlier uh in the next 12 months or so now given energy prices and the ecb delivery this week do you think the bank of england will hike at the september meeting next week well i think certainly it's gonna be a lot of focus and obviously we have the feds the day before which is now close to 20 base points of high price but i think ultimately the answer is no i'm not expecting the bue to hike next week uh the september meeting i think they keep rates on hold at 3.75 probably we still see descent the three descents we saw at the prior meeting so a six three vote split although maybe you could see uh lombardelli join the other dissenters so green man and pill in dissenting for a rate hike but i think ultimately the focus on the energy price moves is there and clearly there's been a reprice at the front end as we've discussed but i think so far the commentary from the bue is probably still not quite at the point of delivering a rate hike here um probably you would expect the language in the minutes to reflect some of the the recent uh indirect effects on inflation from the recent energy spike becoming a larger risk for inflation obviously have been more resilient in the growth data um and actually when you look at the mpc commentary at the treasury select committee this week i mean it wasn't really a sense that the rhetoric or the the view was materially changing but we did hear a tacit acknowledgement from governor bailey that inflation risks are to the upside which might come across in his statement paragraph in the september meeting minutes so i think as well when you kind of take that into consideration plus the fact that the market pricing is round about sort of six or seven base points of rate high expectations for the september meeting i don't think the bank of england will want to surprise although it is fair to note that market pricing has gone up a little bit given the energy moves to be seen this week and also the uh the speed delivery so i think ultimately they skip next week the september meeting and deliver a 25 base point hike uh for november i mean yes you mentioned there the the rate pricing further out of the front end of the curve i mean yes we've seen a very big sell-off this week it reflects the same drives aditi mentioned in terms of the spike higher in gas prices they are moving brent to over a hundred dollars it's really around the middle east tensions and growing risks of more protracted conflict and yes i think you can argue a rise in energy prices does increase the risk of larger indirect effects on inflation but so far you don't see clear evidence of second round wage uh pressures coming through from these inflation channels and there is obviously in the uk the ratchet effect that takes a bit of time for domestic utility prices and electricity prices to adjust upwards based on the off-gen price cap so i think it does look a little bit excessive the over 100 base points of hikes priced uh over the next 12 months but similar to what aditi mentioned what you mentioned as well i mean given the high positive beta to energy prices particularly once we get past the first couple of uh sort of months of the oas curve um and the limited visibility just in terms of where oil and gas go i think it's difficult to be really uh solid in terms of fading these at the moment okay um you know if i go a little bit further out the curve uh 10 year gills are now close to their multi-year highs at like 5.3 percent and third year guilt is now close to six percent uh october budget is approaching um so do you think some of these valuations represent increased fiscal risk premium i don't really think so no i mean i think a lot of this is is the global factors we've kind of discussed in the intermediate sector of the curve that's been weighing on on 10 year and 30 years and the energy driven sell-off at the front has just led to this broad repricing of central bank not just the boe but the uh the ecb as we've seen this week and u.s rate high expectations rather than idiosyncratic uk political or particularly fiscal risk factored into the budget and i think i point out that yes optically these are very elevated levels as you say but actually tenure guilt yields look pretty close to fair value once we adjust uh tenure yields for level of front-end rate so one year one year sonia 10 year dollar so u.s treasury rates and adjusting for some sort of bank of england apf let's say factor um i mean yes there is increased focus on the fiscal dynamics as you mentioned the budget is drawing closer i mean last weekend chancellor healy delivered a speech suggesting the budget will probably be one that's a bit more cautious will exercise a degree of fiscal discipline and i think that is probably reflecting the fact that borrowing costs have risen so i think if that is the message to to sort of take here and this sort of message of continuity around the uk's overall fiscal stance from where the last budget was under under chancellor reeves um i think it's probably likely we see more restrained and limited increase in taxation and spending and i'm probably now less concerned that the budget will result or the run-up in the budget will result in any significant increase in market pricing of uk uh idiosyncratic fiscal risk premium so by that i mean steeper curve that's driven by uk idiosyncratic factors or or narrower swap spreads um and if the budget is delivered in that sort of sense as we sort of have outlined here then probably that's still leaving in place around about half percentage point of fiscal tightening so not something that should really be concerning markets in terms of large amounts of fiscal easing at higher levels of yields and again if you look at the two cents guilt curve as a sort of a proxy for trying to isolate any fiscal risk drivers it's bare flaccid this week following other dm rate markets and reflecting the the large sell-off in the front ends of uk curve and again from a sort of relative standpoint the curve is only screening a couple of basis points steep against front-end yields and the shape of the us curve so i think going forward from here assuming there's no surprises or shifts in the rhetoric we sort of heard already from from chancellor healy as we get close to the budget um i think really there's a limited potential for any fiscal term premium steepening in in the two's tens uk curve or cheapening and swap spreads and i think these global dynamics and front-end sort of repricing a central bank has expectations will continue to be the main driver of tenure yields and third year yield and to be honest if you just look at the 10s 30s curve um despite the fact that yields have risen it sort of trades in a very stable range and doesn't really look like it's it's massively out of line against the shape of of other parts such as the two's tens curve so thank you aditya thank you for ken kigendra that's all from us and thank you for listening stay tuned for more updates on fixed income um here on at any rates jay forgan's global research podcast series this communication is provided for information purposes only please read jay forgan research reports related to its contents more information including important disclosures copyright 2026 jay forgan chase and co all rights reserved this episode was recorded on the 11th of september 2026
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