Rates Spark: US 10yr continues to target 5.25%+
The desk frames the outlook for US 10-year yields as upwardly biased, with a continued targeting of 5.25% to 5.5% driven by resilient macroeconomic data and persistent inflationary pressures. Per the full note from ING, long-end bonds remain under pressure primarily due to higher real yields rather than inflation expectations, indicating that while market sentiment is bearish on long bonds, there are still rate hike fears priced in. Recent auction performance, particularly a tail in the 7-year and a significant tail in the 5-year, underscores these dynamics as the 10-year yield approaches 5.2% amidst strong demand. This tightening in swap spreads, partly supported by Treasury's successful buyback program, acts as a moderate positive for the long end of the yield curve, despite persistent selling pressure on long bonds.
What the desk is arguing
The desk's thesis is that the US 10-year yield is on a trajectory to breach the 5.25%-5.5% range, buoyed by macroeconomic resilience and inflation dynamics. Per the full note from ING, higher real yields are a fundamental driver of this movement, suggesting deep-seated pressures in the Treasury market that aren't merely a byproduct of Fed rate hikes.
Recent auction results provide supporting evidence, with the 5-year bond tailing by 3 basis points earlier this week—underscoring market jitters and deterministic selling pressure on long bonds. The notable jump in yields above 5.1% after the auction indicates that market participants are recalibrating their expectations rapidly, particularly in light of ongoing inflationary pressures.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000 through December 2026. Specific firm targets include: - BofA: Mar26 1.1700, Dec26 1.1500 - Morgan Stanley: Mar26 1.2000, Dec26 1.2150 - Lloyds: Mar26 1.1331, Dec26 1.1200
This view aligns with the prevailing market sentiment highlighted in the commentary, emphasizing a bearish outlook on US long bonds, which for now remains slightly above the median as delineated across firm perspectives.
How other firms see it
Firms aligned with the bullish outlook towards US yields include Commerzbank and ING, advocating for higher yield targets in the near term. In contrast, Danske Bank expresses a more restrained view, anticipating limited upside potential, which suggests some divergence in perspectives on bond market dynamics.
Related to this discussion is the trajectory of the EUR/USD, particularly as it intersects with expectations for European Central Bank's policy shifts. Market participants should also monitor how bond yields influence broader exchange rate movements as trading weeks unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US 10-year yields are targeting 5.25% to 5.5%
- 02Resilient macro data underpins higher yields
- 03Existing inflation expectations remain contained
- 04Swap spreads expected to re-widen in the 10-year area
Market implications
Watch for the 10-year yield's proximity to the 5.2% level as a psychological threshold. Any significant movements beyond this level could provoke shifts in the EUR/USD trajectory, especially in the context of upcoming central bank communications.
Risks to this view
Should the Fed signal a more hawkish stance or if inflation prints surprise to the upside substantively, this could reverse expectations, leading traders to seek safety in bonds again, thus compressing yields away from the 5.25% target.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 1.1500 |
Scotiabank | Bullish | 1.1700 |
ANZ | Bullish | 1.1700 |
Articles Rates Spark: US 10yr continues to target 5.25%+ Published 19:00 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The overshoot to the 5.25%-5.5% area for the US 10yr yield is ongoing. The front end paused after valuations looked stretched, but resilient macro data, elevated energy prices and inflation pressures generally continue to pressure yields higher Padhraic Garvey, CFA and Benjamin Schroeder Bearish sentiment continues for long-end bonds The rate hike discount looks extreme, but long bond yields can remain under pressure The US 7yr auction tailed moderately. Not as horrendous as the previous day's 5yr auction, which tailed by a substantial 3bp.
That auction was the last straw on Wednesday, prompting a follow-through rise in the 10yr yield to over 5.1%. Fast-forward to Thursday, and we're suddenly knocking on the door of 5.2%. And the driver?
Predominantly it's higher real yields, as it has been for a number of months now. Which is important, as this is not shielded by the Fed hiking rates, which could be the case if we had an inflation expectations issue. We have a printed inflation problem in the rear-view mirror, but inflation expectations in fact remain relatively contained.
Ahead, we think that there are enough rate hike fears discounted at this juncture, and certainly enough to take care of perceived inflation risks. But, government bond yields are primed to remain under pressure on a pure debt dynamic theory, which translates into pressure for some re-widening in swap spreads, and especially in the 10yr area. So far, Treasury Secretary Bessent's buyback programme has in fact been successful in the sense that it was followed up by tighter swap spreads.
Thursday saw US$4.1bn bought back in the latest reverse auction, but we're not of the opinion that the market should be overly concerned with this, in the sense that it's not a negative. It’s still a moderate positive for the long end, as the Treasury is doing at least double what they did. We get there is disappointment that it has not been more.
But that was never intimated by the Treasury Secretary in the first place, in our opinion. The Treasury Secretary, in fact, should be pleased that swap spreads remain relatively contained, so far at least. The bearish narrative remains intact with none of the key drivers behind the recent sell-off is showing signs of fading None of the drivers that brought us the increase in rates are going away.
The front end has taken a small breather after valuations started to look stretched, even as oil continued to climb. For the European Central Bank, a full 100bp priced in over the next year does appear ambitious, given that there is still a lot of uncertainty around the outlook. But ECB chief economist Lane basically confirmed on Thursday that the ECB sees itself confronted with the adverse energy market scenario while, at the same time, all data points to ongoing macro resilience.
Sources & References
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