Rates Spark: Long-end risks, ECB conviction and UK data tests
Lead — The desk suggests that while front-end rates in the USD are muted due to lowered Fed hike odds, the long end shows fragility primarily driven by upward pressures on real yields and fiscal concerns. This perspective aligns with recent bank research indicating a potential increase in long-end Treasuries due to financial dynamics and geopolitical factors. Per the full note source, Treasury yields, particularly the 10Y, may be at risk due to fiscal supply pressures exacerbated by a deteriorating fiscal position.
What the desk is arguing
The desk views the long end of the USD rates curve as particularly vulnerable in the short term, with increasing real yields and looming fiscal supply pressures likely to push 10Y Treasury yields higher. This aligns with observations around the September ECB meeting, which is underscoring a potentially tightening policy stance in response to economic conditions in Europe.
Despite relatively stable front-end rates—with a Fed hike probability now sitting at just over 30%—the focus shifts to longer maturity bonds, where there's anticipation of continued upward pressure. Recent CPI data has been benign but does not negate the overall risk premium associated with potential long-end rate increases.
Where it sits in our coverage
For EUR/USD, the current consensus target is 1.1700 for March 2026, spanned between 1.1200 to 1.2000. Notably, commerzbank projects 1.1900 for March 2026 and ING aligns with 1.1700 for the same tenor. This positioning situates our desk’s thesis towards the upper end of expectations, suggesting that traders need to be particularly cognizant of the long-end rate dynamics.
How other firms see it
Aligned views predominantly come from firms anticipating stronger long-end yields such as commerzbank and ING, suggesting a cohesive sentiment towards the vulnerabilities outlined. In contrast, firms like goldman and hsbc are more cautious, possibly indicating lower anticipation towards sustained long-end pressures.
The trajectory of USD/JPY will be significant, particularly as shifts in yield dynamics could spill over from U.S. Treasuries to the yen environment, especially considering the current 160.4700 spot and expected targets from other firms like morganstanley at 150.0000 by March 2026.
Key takeaways
- 01Long-end rates may face upward pressure from rising real yields.
- 02Front-end rate stability contrasts with vulnerabilities in the Treasury long end.
- 03Market attention is focusing on potential spillovers from the yen story.
- 04Key data points ahead include CPI and employment metrics before upcoming Fed meetings.
Market implications
Watch for potential shifts in the 10Y Treasury yield, as any spikes due to fiscal pressures could influence EUR/USD and GBP/USD movements. The September ECB meeting should be a critical junction in assessing these dynamics.
Risks to this view
A significant catalyst that could reverse this outlook would be a dovish signal from the Federal Reserve during upcoming communications, particularly if they indicate a willingness to further delay rate expansions despite long-end pressures. Additionally, a sharper-than-expected improvement in US economic data could weaken the case for rising yields.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Société Générale | Bearish | 1.1400 |
Scotiabank | Bearish | 1.1200 |
Commerzbank | Bullish | 1.2200 |
Articles Rates Spark: Long-end risks, ECB conviction and UK data tests Published 07:30 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lower Fed hike odds have calmed front-end USD rates, but long-end Treasuries remain vulnerable to higher real yields, fiscal supply pressure and yen spillovers. In Europe, markets remain focused on a September ECB hike, while hawkish UK pricing faces key labour and CPI tests Benjamin Schroeder Despite benign US CPI data, we think long-end rates remain vulnerable to the upside on higher real yields and a deteriorating fiscal position Treasuries: A vulnerable long end Last week’s CPI data was benign, and markets have scaled back Federal Reserve rate hike expectations, with September hike odds now at just over 30% rather than 50% as seen ahead of the release. Until we get to the Jackson Hole Economic Policy Symposium at the end of this month, a quieter calendar should also argue for less volatility from this angle.
It will only be early next month when we get the next set of jobs and inflation data ahead of the September Fed meeting. This week we will see the S&P PMIs, where consensus expects a marginal softening. Overall, they should remain solidly in expansionary territory.
Given they are also less influential than their ISM counterparts, they should not change the market's thinking unless there is a huge downside surprise. The FOMC minutes of the July meeting, released on Wednesday, might be more helpful for refining expectations as they should present the views of the broader committee. While we continue to see scope for lower front-end USD rates as we still look for the Fed to eventually cut rates next year, long-end rates remain vulnerable in the meantime.
Higher real yields and fiscal deterioration raising Treasury supply pressure can keep upward pressure on 10Y Treasury yields. We are also on the lookout for potential spill-overs from the yen story. We see yields still gravitating more toward the upper end of the recent range.
Bunds: Very little to distract markets from a September hike Given an absence of noteworthy eurozone-specific data, EUR rates have remained closely tied to US dynamics. Another main driver is energy price dynamics. While the link remains closest with oil as a gauge of Middle East tensions, gas prices should be monitored as they approach crisis highs again.
With efforts to fill gas storage lagging behind those of previous years, pressures could still build further down the line. The continuing drought and the disruption it causes to supply routes and energy generation can add to inflationary pressures. At the same time, it is also likely to become a drag on growth, with Germany particularly vulnerable.
Sources & References
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