Rates Spark: Another push higher in real rates
Lead — The desk frames this as a critical moment where real rates, rather than geopolitical tensions, are shaping market dynamics. Per the full note source, recent US strikes against Iran have pushed oil prices above $76 per barrel, yet the more significant influence is coming from real rates driving upward pressure across global curves. Current positioning reflects a hawkish bias that may be out of step, particularly with the prospect of lower 2-year real rates in both USD and GBP sets the stage for a potential steepening effect in the near term. The market has fully priced in another ECB rate hike by year-end, but this consensus should be revisited as real rates stabilize.
What the desk is arguing
The desk highlights the pressures on real rates as a pivotal driver behind recent movements in global fixed income markets. Per the full note, the recent uptick in oil due to geopolitical factors contrasts with the narrative in rates where USD and GBP curves demonstrate notable divergences, with the USD flattening and GBP steepening against a backdrop of hawkish expectations.
Current positioning appears overly optimistic, especially in light of tightening market spreads, which typically realign over time. This is evidenced by the stark contrast between the USD 2s10s flattening and the GBP curve steepening by 90bps.
Where it sits in our coverage
For our EUR/USD coverage, the consensus target is 1.1700 with a range from 1.1200 to 1.2000. Notable firm targets include commerzbank at 1.2200 and morganstanley at 1.2300 for Dec-26.
Generally, our outlook aligns with the upper bound of spread forecasts, considering the bullish sentiment and positioning that could unravel if real rate expectations adjust more dovishly, leading traders to recalibrate their strategies accordingly.
How other firms see it
Firms including commerzbank and goldman are anticipating a strengthening EUR/USD trajectory, with targets pushing towards the higher end of the spectrum. Conversely, citi and hsbc hold more conservative views, suggesting a cautious approach to future rate adjustments.
This dovish positioning is crucial as GBP/USD trends could further influence these dynamics, especially with any ECB moves affected by the current fiscal concerns in Europe.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Real rates are the dominant factor influencing market dynamics over geopolitical tensions such as the Iran conflict.
- 02Current market positioning is likely too hawkish, suggesting potential for a downward repricing of 2-year real rates.
- 03Divergences in yield curves across USD and GBP suggest volatility ahead, with potential for steepening in the USD curve.
- 04Oil prices reaching new highs due to geopolitical tensions may amplify corrective moves in rates.
Market implications
Watch for the USD 2s10s curve as a key indicator; any revisions in hawkish positioning could lead to a correction in real rates, contributing to further steepening dynamics. Additionally, the unfolding economic data will add layers to this narrative.
Risks to this view
A shift toward more dovish signals from central banks, particularly the ECB, could invalidate the current bullish positioning in rates. Also, stronger fiscal discipline in Europe might lead to a stabilization of yields, counteracting current volatility.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | — | 1.1445 |
MUFG | — | 1.1800 |
HSBC | — | 1.1050 |
Articles Rates Spark: Another push higher in real rates 08:07 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US strikes against Iran send oil prices higher again. However, it is real rates that are posing upward pressure on the entire curve, but divergences in real-term spreads between US, UK and eurozone markets should narrow at some point Michiel Tukker and Benjamin Schroeder Markets remain concerned by France's fiscal trajectory, which makes it more difficult to reduce the deficit Divergences in real term spreads unlikely a stable equilibrium The latest US strikes on Iran in reaction to the attacks on ships in the Strait of Hormuz have sent oil prices higher, with Brent topping US$76/bbl. The feed-through to rates via front-end pricing is clear, and markets, for instance, are back to more than fully pricing another hike from the ECB before the end of the year.
But real rates have been a driving force of global rates over the past weeks and are likely to keep volatility elevated going forward. Historically, we see that global 2s10s swap curves in real terms correlate tightly, but more recently we have observed significant divergences. Global risk premia tend to move in sync and the figure below highlights the strong co-integration of term spreads of developed markets.
Over time, the 2s10s curves seem to converge to similar values, which is consistent with the idea of converging risk premia. Before the start of the Iran conflict, the term spread seemed to be stabilising around 50bp for USD, EUR and GBP rates. But in recent weeks the USD 2s10s has almost fully flattened in real space, while the sterling curve is a steep 90bp.
For both currencies, we think markets are positioned as too hawkish, and thus we see downside potential for 2y real rates. A front-end repricing lower would help steepen the USD 2s10s without the 10y having to do much. In contrast, the already steep GBP curve means that 10y sterling rates should have more room to follow lower in case of a front-end repricing.
Historically, real term spreads tend to converge over time French presidential elections: Markets want to see fiscal improvements, regardless of who brings them Markets have shown muted reaction to the headlines surrounding Le Pen, who has now decided to enter the presidential race. One reason is that with Jordan Bardella, the RN would have had someone to send into the race in her place who was even slightly ahead in the opinion polling. The market’s main concern remains the country’s fiscal trajectory.
Current economic headwinds make it more difficult to bring down the deficit, and political uncertainty also muddies the trajectory for coming years. Spreads of 10y French government bonds over their German peers have widened back towards the 80bp mark over the past weeks, although the level overstates widening somewhat given a maturity mismatch between the current benchmark bonds. Expect it to even out by a couple of basis points when Germany launches its new 10y Bund benchmark.
Sources & References
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