Rates Spark: US and France like ships passing in the night at 5%
The desk observes a significant shift in yield dynamics, with the US 10-year Treasury yield dipping below 5%, while French 10-year bonds have surged above this figure, widening the spread. Per the full note , this divergence indicates a clear risk-off mood which may not sustain the US yield below 5% for long. Inflationary pressures, fiscal deficits, and impending US mid-term elections could contribute to upward pressure on Treasury yields. Current consensus among institutional traders sets the EUR/USD at 1.1253, with an eye toward broader economic indicators amidst uncertain market sentiment.
What the desk is arguing
The desk contends that the recent dip of the US 10-year yield below 5% is unlikely to hold, forecasting a reversion back above that level due to ongoing inflation risks and an approaching election cycle. Per the full note , the French 10-year bond now yielding above 5% is notable, particularly as it highlights a diverging monetary narrative between the US and France, emphasizing the growing premium in French bonds that may continue to attract safe-haven flows.
This divergence is underscored by a widening spread of 175 basis points between French bonds and German Bunds, reflective of heightened market anxieties. A prevalent risk-off sentiment in global markets likely supported this flight to safety but may prove transient; thus, the desk anticipates the US yield will react back upward once immediate pressures recede.
Should the yield remain above 5% longer than expected, it would suggest a more prolonged economic downturn rather than a temporary setback for US Treasury yields.
Where it sits in our coverage
For the EUR/USD, current consensus targets range from 1.1200 to 1.2000 with a median of 1.1700 by March 2026. Specific targets include: - commerzbank: 1.1900 (Mar26), 1.2000 (Jun26) - rbc: 1.1700 (Mar26), 1.2000 (Jun26) - nomura: 1.1700 (Mar26), 1.1800 (Jun26)
The desk's outlook aligns closely with market consensus, albeit slightly more bearish at the current spot of 1.1253, near the lower end of the spectrum. This positioning suggests traders do expect further volatility following the risk-off narrative and the broader implications of US fiscal policies.
How other firms see it
Many firms, including commerzbank and rbc, anticipate relative stability in the EUR/USD with a consistent upward trend in targets for 2026. However, some firms diverge, notably tmgm, forecasting a much lower target of 1.1447 in March.
The ongoing divergence in yields and monetary policy stances between the US and Europe could lead to important movements in other relevant currency pairs; traders should keep an eye on the USD/JPY as it too reflects shifts in US monetary policy dynamics amidst Japan's ultra-loose stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US 10-year yield has dipped below 5%, while French government bonds yield above 5%.
- 02Increasing inflation risks and fiscal concerns point toward upward pressure on Treasury yields.
- 03Market sentiment indicates a risk-off environment possibly delaying recovery for US yields.
- 04Current consensus for EUR/USD remains stable, though divergence from the US yield may create volatility.
Market implications
Watch for any signs of volatility in the US yield as it approaches critical resistance levels above 5%. The upcoming geopolitical and market dynamics from the US mid-term elections might also provide catalysts for significant shifts.
Risks to this view
A swift shift back to risk-on sentiment could invalidate the desk's yield outlook, especially if inflation data improves or if geopolitical tensions ease significantly, leading to a decline in safe-haven demand.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1600 |
ING | Bullish | 1.1300 |
Société Générale | Bearish | 1.1000 |
Articles Rates Spark: US and France like ships passing in the night at 5% Published 16:47 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The US 10yr yield gapped back below 5% with some conviction. We're not convinced it keeps on going. More likely it ultimately reverts up again.
Brent oil pushed above $110 for the first time since May, but weaker market sentiment prevented a hawkish repricing. French bond spreads continue to surge, and we struggle to see catalysts to push against this Padhraic Garvey, CFA , Michiel Tukker and Benjamin Schroeder 10-year French government bonds are now yielding above 5%, whereas the US 10-year Treasury has dipped below 5% The US 10yr back below 5% - let's see how it feels down there The US 10yr yield broke back below 5% around midday in New York trading on Thursday. And did so with a degree of conviction.
We thought 5% could hold, but always acknowledged that a heightened (and still heightening) risk-off tone could in the end dominate, at least for the near term. The fact that the French 10yr has gone the other way and shot above 5% in recent days, and the spread out to 175bp vs Germany, is also of relevance. We also note that Thursday was the first day of pronounced flight into Bunds since the French wobbles took hold.
Treasuries have shared in this. Whether we remain below 5% is a whole other question. We're minded to expect it to snap back above, as we still have inflation / fiscal deficit / AI boom underpinnings to navigate.
And we have the US mid-term elections approaching as an excuse for trouble. But it will need some degree of calm in the risk space first. What happens on Friday is anyone's guess, and it may well be that longs in cash bond duration offer comfort to most through an uncertain weekend.
We'll see. We still think the 10yr yield gets back above 5% ultimately. The timing for that is a tougher call.
It's also true that there has been a tendency shown in recent weeks to buy into concessional 5+% levels for the US 10yr. We saw that in spades post the recent poor CPI number, which was followed by an immediate sell-off in Treasuries, but then an even bigger subsequent rally. In a way, the latest break below 5% is a culmination of that move.
Now that 5% has been breached below, where next? More pertinently, can the market find comfort at sub 5% levels given the contemporaneous inflation dynamic. And, can the market really ignore the fact that neither side has a plan for the fiscal deficit as we roll into the mid-term elections in the next couple of weeks.
Sources & References
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