Rates: Calmer, but dodgy overshoot risks remain
The desk believes that while recent calm in long-end US Treasury yields offers a reprieve, the landscape remains precarious due to underlying pressures such as elevated inflation and geopolitical tensions in regions like Ukraine and Iran. Per the full note , the expectation is that the US 10-year yield could move up towards 5.5%, with broader impacts felt across currency pairs like EUR/USD and GBP/USD. This backdrop poses both risks and opportunities ahead as traders navigate potential overshooting in yields and currency volatility. With no significant releases on the calendar, focus remains on these evolving dynamics.
What the desk is arguing
The desk emphasizes that the recent stabilization of long-end Treasury yields is likely temporary, as several stress-inducing factors are still at play in the market. Per the full note , the outlook for US 10-year yields suggests a potential rise into the 5.25% to 5.5% range amid ongoing geopolitical uncertainties and inflationary pressures.
The commentary raises concern about fiscal policy influences and ongoing geopolitical tensions which could sustain pressure on yields, with a notable reference to ongoing conflicts in Ukraine and Iran. These factors could keep market participants on edge and contribute to future volatility.
Where it sits in our coverage
Our internal consensus for EUR/USD currently stands at 1.1253, with the median forecast for March 2026 ranging from 1.1200 to 1.2000. Notably, firms such as rabobank and socgen have set their March 2026 targets at 1.1759 and 1.1700 respectively, reflecting optimism towards the pair despite the current pressures.
The desk's view aligns closely with the upper range of forecasts, indicating a cautious optimism ahead of potential EUR/USD movements while acknowledging the risks highlighted in the source commentary. Additionally, forecasts for GBP/USD suggest varying targets among firms, adding to the complexity of positioning in this environment as traders weigh the yield outlook.
How other firms see it
Among firms, sentiments are mixed, with those like socgen and rabobank appearing aligned with the desk's expectations for EUR/USD, while firms like bofa signal contrary views on GBP/USD forecasts. bofa, in particular, shows a bearish target for GBP which contrasts with the desk’s cautious optimism.
The trajectories of EUR/USD and GBP/USD are closely knit to the expectations around US Treasury yields, particularly in light of the Federal Reserve's ongoing approach to rate hikes. Traders should keep an eye on how developments around geopolitical tensions might spill over into these currency pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent stabilization in long-end US Treasury yields may be temporary, with expectations of rises towards 5.5%.
- 02Geopolitical tensions in Ukraine and Iran add layers of complexity to yield forecasts.
- 03Current EUR/USD consensus sits at 1.1253, with firms like rabobank and socgen leaning towards higher targets.
- 04GBP/USD forecasts reflect a divergence among firms, indicating mixed sentiment in the currency markets.
Market implications
Traders should monitor the potential approach of the 5.5% level in US 10-year yields, as this could trigger cross-market reactions impacting currency pairs such as EUR/USD and GBP/USD. Additionally, upcoming geopolitical developments may significantly influence market sentiment and positioning.
Risks to this view
A shift in the geopolitical landscape or a surprising pivot in monetary policy could rapidly alter the yield trajectory, thus reversing expectations of the current bullish outlook. Any sustained easing of inflationary pressures might also dampen the anticipated rise in yields.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Barclays | Bullish | 1.2100 |
Bank of America | Bullish | 1.1500 |
UOB | Bearish | 1.1140 |
Articles Rates: Calmer, but dodgy overshoot risks remain Published 09:45 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We've managed to get through a week without mapping out new multi-decade highs in various long yields and spreads. That's great, but we'd not get too comfortable. Many of the drivers of prior stresses remain in play.
And muddy developments in the Ukraine and Iran wars make for difficult interpretation – enough to keep us all on edge, at least Padhraic Garvey, CFA The mood for US Treasuries has calmed. But don't get too comfortable Long-end yields have calmed in the past week or so. But pressures remain.
The medium-term issuance narrative stemming from fiscal largesse remains. That’s the 'bad'. Then there’s the 'ugly', in the guise of energy price pressure stemming from the Iran war.
That has coincided with higher printed inflation. Arguably, this is the biggest direct impact, as it has prompted central bank rate hikes. And there is the 'good'.
Higher real rates have been an important driver, and a part of this likely incorporates AI-driven productivity growth. If that last part was the central driver, we’d have little to worry about. But it’s the other, more sinister factors that have predominantly sparked long-end market jitters.
The balance of probabilities suggests there is at least one more leg of long-end weakness still to play out. This could take the US 10-year yield back into the 5.25% to 5.5% range. Other markets would likely move in tandem, mapping out similar, albeit less dramatic, blow-outs.
With 5.25% looking like a mean-reversion level, we think the US 10-year yield could overshoot towards 5.5% and remain elevated for a number of months as bond market jitters persist. This could quite easily extend into the first quarter of 2027. For later in 2027, we think inflation will come down, and long rates should too.
On the growth side, we have a 2% real growth forecast tendency for 2027. If we’re wrong and we’re on the verge of a macro boom (and/or persistently elevated inflation), that’s a whole other story, and it would be a route to 5.5-6%. The other way to get there could be the US fiscal story finally unravelling in a bad way, but we aren't quite sure we can call for that yet as a baseline view.
For 2027, we have growth of 2% and inflation of 2% (or slightly above on both counts). That points to 4.75%, representing a mild upside bias relative to the 4.5% level we view as broadly neutral. But first, we need to get through 2026.
Sources & References
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