Rates Spark: So how bad could this whole thing get?
Lead — The desk highlights increasing concerns surrounding US long-term bond yields, emphasizing the potential for the US 10-year yield to reach or exceed 5%. Per the full note by ing-think, this reflects pressures from both inflation and fiscal deficits, with real yields appearing to be anchored by emerging productivity enhancements from AI. Current consensus points to key currency pairs, like EUR/USD and GBP/USD, possibly responding to these yields as traders navigate their bond market implications. With no major upcoming calendar events expected within the next month, traders will have to monitor emerging data closely to gauge future shifts.
What the desk is arguing
The desk argues that rising US long-term bond yields pose a significant risk, potentially bringing the US 10-year yield to 5%. This assessment is driven by increasing inflationary expectations and fiscal pressures that shape bond supply dynamics. Per the full note from ing-think, the current yield environment could veer towards historical highs reminiscent of the dot-com boom, with nominal yields on the rise.
The focus on long-dated yields indicates that current levels are roughly 30 basis points above what the desk views as 'normal' yields, with the US benchmark sitting at 4.5%. The acknowledgment of a concurrent rise in real yields, as influenced by anticipated productivity advances associated with the AI era, shapes the future outlook, reinforcing the desk’s skepticism on holding lower yield positions.
Where it sits in our coverage
For the EUR/USD pair, our current spot is 1.1446, with the median consensus for December 2026 pegged at 1.1700 (target ranges from 1.1200 to 1.2000). Similarly, for GBP/USD, the current spot is 1.3300, aligned with a December 2026 forecast of 1.3500 from morganstanley and ing.
The prevailing view aligns closely with the third-party consensus, particularly from stanchart and ubs; however, it occupies a slightly lower range than the upper forecasts, indicating caution in bullish projections amidst rising yields.
How other firms see it
Several firms, including rbc and hsbc, hold aligned views, anticipating moderate increases in GBP/USD and EUR/USD due to rising rates. In contrast, firms like nomura and citi project more conservative targets for these pairs, reflecting broader apprehension towards aggressive rate hikes.
The trajectory of USD/JPY is particularly notable, as rising yields interplay with Japanese monetary policy under the BoJ. Analysts should keep an eye on fluctuations in this pair, which can further highlight the dynamics initiated from US yield movements and their broader impacts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US 10-year yields could reach or exceed 5%, reflecting risk in bond markets.
- 02Current 10-year yields are 30 basis points above the desk's 'normal' valuation.
- 03Rising real yields linked to productivity growth pose a challenge to existing yield levels.
- 04EUR/USD and GBP/USD may react to these dynamics amid unchanged expectations in the upcoming calendar.
Market implications
Traders should watch for the US 10-year yield approaching 5% as a critical threshold that could impact the direction of EUR/USD and GBP/USD. With the absence of high-impact calendar events, the focus should pivot to emerging economic data reflecting growth and inflation.
Risks to this view
Should inflation insights reveal more stability or a reversal in spending levels, the sentiment around yields and resultant currency flows could shift dramatically, potentially easing pressure on long rates. Conversely, unexpected dovish stances from the Fed could undercut the thesis.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Standard Chartered | Neutral | 1.1600 |
Articles Rates Spark: So how bad could this whole thing get? Published 19:58 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We took a bit of a breather on bond markets through Wednesday. But here's a question – how bad could things get for the back end?
We map out some causes and affects, and draw some historical parallels. We don't call for it, but the height of the dot.com boom saw the US 10yr real yield hit 4%. And the 10yr nominal yield? 6% Padhraic Garvey, CFA We see the US 10yr yield approaching 5% The drivers of higher long tenor yields There are two key drivers of long-dated bond yields – inflation and the fiscal deficit.
The former impacts the real return attainable from bonds, while the latter helps determine the supply of bonds. Arguably, nothing else should matter, and if they do, it's only to the extent that they ultimately impact inflation and the supply of bonds. Fundamentally, the recent rise in long bond yields relates back to these.
We’ve long argued that 4.5% is 'normal' for the US 10yr yield. And for the eurozone, that translates to 3% for the 10yr. We’re now running at some 30bp above these normal valuations.
That 30bp can in part be explained by the aforementioned factors. At the same time, the dominance of higher real yields as the driver of nominal yields in the past six months suggests that the pressure being felt in long rates is not necessarily inflation dominated. Higher real yields reflect issuance pressure (current and anticipated).
But it also likely incorporates a positive productivity growth slant coming from the AI revolution. Fed Chair Warsh specifically referenced a positive secular growth dynamic up for discussion at the opening of the G20 summit in North Carolina. That gels with higher real rates, and fits with the upward pressure being seen on long-end yields.
A notable story too is the Japanese 30yr yield, which has touched 4.2%. That's four times the policy rate (currently 1%). There is clearly a tension between these two.
The genesis of that is the evolution of a normalised inflation dynamic. The Bank of Japan (BoJ) has undershot versus this, so the long end has had to overreact. But the root cause here is a slow BoJ.
US fiscal pressure, together with a changing (US) political dynamic, has injected an increased defence need for European governments, in turn adding to fiscal spending requirements in the future. And various energy shocks have added to European inflation pressure. That, together with a far more troubling contemporaneous inflation dynamic, is forcing eurozone yields to the upside.
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