Rates Spark: Hikes coming, but bond yields choosing to fall
The desk views the current trajectory of US Treasuries as indicative of a broader sentiment pivot in the bond market, with yields unexpectedly retreating amidst expectations for rate hikes from both the Fed and ECB. Per the full note from the source, while December rate hikes appear imminent, the recent movement in Treasury yields—particularly the drop below 5% for the 10-year yield—suggests that market participants may be prioritizing broader economic sentiments over inflation forecasts. Current consensus for the EUR/USD is targeted at 1.15 by December 2026, slightly above the current spot, indicating a potential bullish outlook for the euro as the ECB approaches a tightening cycle. The upcoming eurozone CPI and GDP data releases will likely further clarify market positioning ahead of critical central bank decisions this December.
What the desk is arguing
The desk suggests that the bond markets may be getting ahead of themselves by pricing in lower yields, despite the outlook for central bank hikes. Per the full note, this sentiment could signal caution as significant inflationary pressures remain evident, with core PCE data for the US at 3.1%, far from the Fed's target of 2%.
Additionally, the 7-year auction revealed decent demand, which could signal that buyers are reassessing their risk appetite amidst mixed economic signals. This demonstrates a willingness among investors to overlook tightening policy signals in favor of perceived equity market stability. However, this trend contradicts our expectation of returning to higher yields, indicating a fragile balance in market sentiment.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.15, with a range from 1.1162 to 1.2000. Specifically, firms like commerzbank and rbc are forecasting 1.22 and 1.17 for December 2026, respectively, suggesting a fairly optimistic view of the euro's future strength.
This desk view aligns with the upper end of the consensus spread, highlighting a prevailing bullish sentiment towards the euro amidst anticipated ECB policy shifts.
How other firms see it
Aligned firms such as scotiabank and bnpparibas echo a similar position on the euro, forecasting targets of 1.36 and 1.15 for Mar-26, respectively. However, some firms like nomura see potential for a weaker euro, with targets closer to 1.32.
Monitoring dynamics within the USD/JPY pair will be essential, as this currency pair's movement can mirror shifts in both the Fed's trajectory and Japanese monetary policy, potentially affecting the EUR/USD outlook significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US Treasury is exhibiting unexpected yield declines despite an anticipated rate hike from both the Fed and ECB.
- 02Inflation remains well above target, complicating market sentiment around bond yield trajectories.
- 03The current EUR/USD consensus suggests potential upward movement, supported by ECB tightening.
- 04Upcoming eurozone economic data will be crucial in shaping market expectations ahead of the December central bank meetings.
Market implications
Watch the 10-year US Treasury yield level as it approaches critical support at 5%. Also, keep an eye on the eurozone CPI and GDP data releases scheduled shortly—these figures are likely to bolster or diminish the bullish narrative for EUR/USD.
Risks to this view
A notable deviation in inflation figures or macroeconomic data that leads to a recalibration of interest rate expectations could prompt a reversal in the current sentiment. Additionally, signs of instability in equity markets could redirect flows back into Treasuries, pressuring yields higher.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bullish | 1.2150 |
StoneX | Bearish | 1.1000 |
Standard Chartered | Bullish | 1.1800 |
Articles Rates Spark: Hikes coming, but bond yields choosing to fall Published 19:45 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US Treasuries are in a mood to test the downside for yields after all. Still not sold on following through on it. But monitoring.
The ECB meeting did not change our rates outlook and confirms a December hike is likely. We brace for more volatility as Friday's CPI and GDP readings from the eurozone are important ingredients in markets' rate hike expectations Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker As with the Federal Reserve, we look for a December rate hike by the ECB as upside inflation risks persist US Treasuries looking through the rate hike narrative for December The US 10yr yield made a decisive gap away from 5%, but to the downside. This was not a fundamentally driven move, in the sense that Thursday's PCE inflation data continued to point to an ongoing significant deviation from where Chair Warsh would like to see it at (he reiterated in the aftermath of the FOMC meeting that he wants to see 2% on core, but it rose to 3.1% for September).
The income, spending and jobless claims data were also in line, and at the firm end of the range. Instead, Treasuries are willing to remain quite responsive to the vagaries of the sentiment on AI valuations and equity market wobbles. Nothing terribly sinister went down here, but the ongoing mood music has just turned that bit sour.
Meanwhile, the 7yr auction was fine, with no tail, and met decent demand. What we can say is the move was more a back-end thing than a front-end one. Some chunky flows did go through on the buy side.
We can't ignore this move, as it's contrary to our preferred morph back in the direction of higher yields. But there is not enough in it to cause us to change our tune. ECB close to a next hike Although debating it, the European Central Bank (ECB) refrained from a rate hike on Thursday.
The tightening of financial conditions amid rising bond market yields tipped the balance, as they have done the work for the ECB. The signal that a December hike was in the offing was pretty clear. Unless we get any positive developments in the Middle East, or adverse developments in French bond markets, December looks like a done deal.
And markets have been treating it that way already, with more than 20bp of tightening discounted. The market takeaway from Thursday's events was still a less hawkish one. A Reuters report about ECB staff estimating that higher bond yields could cut cumulative growth by 100bp and inflation by 90bp in 2027-2028 relative to the September projection adds to the notion that the December hike could be the ECB’s last of the cycle.
Sources & References
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