Rates Spark: US long-end under increasing scrutiny
Lead — US long-end yields face increasing scrutiny as fiscal concerns, resilient economic growth, and energy risks exacerbate bearish steepening trends. Per the full note from ing-think, the market is viewing the impact of Fed Chair Kevin Warsh's speech at Jackson Hole with caution, particularly with the core PCE inflation measure due soon. Current market pricing implies only a 40% chance of a September rate hike, down from over 70% at the start of August. This backdrop creates persistent bearish sentiment towards the long end, impacting key currency pair dynamics, particularly EUR/USD, GBP/USD, and USD/JPY.
What the desk is arguing
The desk's thesis centers on the view that US long-end yields will experience sustained pressure, exacerbated by fiscal concerns and potential tech-related supply. Per the full note, recent increased liquidity operations by the Treasury have highlighted the unsustainable nature of rising debt loads, drawing attention to the need for broader spending cuts, which remain limited without congressional support.
The current focus on inflation, particularly the core PCE data to be released soon, is critical. Recent benign CPI prints have enabled the market to reduce the pricing of rate hikes, which has implications for the front and back ends of the yield curve. The desk suggests that a bearish steepening is likely to continue as underlying fiscal challenges remain unaddressed.
Where it sits in our coverage
For the EUR/USD, the current spot is 1.1679, with a median consensus target of 1.1700 (range: 1.1200–1.2000) for March 2026 highlighted by firms such as anz (1.1609), morganstanley (1.2000), and commerzbank (1.1900). Meanwhile, for GBP/USD, the current spot is 1.3360 and consensus targets also align around 1.3400. The desk's bearish perspective on long-end yields suggests an alignment with commerzbank at 1.3520 for March 2026.
The risks posed by long-end yields and inflation expectations indicate that the desk's view aligns with the higher-end forecasts of several firms but highlights ongoing uncertainty in the fiscal landscape, which could influence broader market dynamics.
How other firms see it
Firms aligned with bearish sentiment include anz and commerzbank, which predict lower EUR/USD and GBP/USD targets, while morganstanley offers more optimistic targets for both pairs. Contrarily, firms like citi and hsbc, which offer more conservative targets for GBP and EUR, suggest a divergence of outlook regarding long-end yield pressures on these currency pairs.
The trajectory of EUR/USD, coupled with Fed responses to inflation, remains vital, especially as expectations around the core PCE measure are in the spotlight ahead of the Fed's strategic discussions at Jackson Hole.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US long-end yields are under pressure due to fiscal concerns and inflation expectations.
- 02Current market pricing suggests only a 40% chance of a September rate hike.
- 03The bearish steepening theme persists despite support for the front end of the yield curve.
- 04Upcoming core PCE data and Fed Chair Warsh's remarks will be key catalysts.
Market implications
Watch for potential steepening in the US yield curve, particularly if inflation data deviates from expectations. Positions in EUR/USD and GBP/USD may be sensitive to changes in yield dynamics, especially considering the current spot positions.
Risks to this view
Should the Fed signal a more hawkish stance than anticipated, or if fiscal measures to significantly rein in spending are announced, the bearish steepening scenario could be invalidated, leading to a reversal in current market sentiment.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Articles Rates Spark: US long-end under increasing scrutiny Published 07:59 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US and EUR long-end yields remain under pressure from fiscal concerns, resilient growth, energy risks and renewed supply, keeping bearish steepening risks intact even as benign US inflation supports the front end Long-end yields remain under pressure amid fiscal concerns US: A bearish steepening theme is more likely to persist The US long end will remain under scrutiny. The US Treasury’s attempt to dampen the rise under the guise of scaled-up liquidity operations has only drawn more attention to the underlying issue, the growing debt load and the limited ability or willingness to rein in the US deficit. While it has been signalled that some announcements to cut back on wasteful spending will be made in coming days, without a big rethink coming from Congress, we are only looking at trimming the edges.
There are other factors aggravating the situation in bond markets, such as the tech-related issuance (markets will be paying attention to this week’s earnings) and, on the monetary policy side, the ongoing concern with inflation. On the latter, some of the heat has come off though. The market will be looking to the Federal Reserve's favoured inflation measure, the core PCE, this Wednesday.
But the CPI release has already been benign alongside other indicators, e.g. producer prices. That means Fed Chair Kevin Warsh might be under less pressure to provide the clarity the market is seeking when he delivers his speech at this year’s Jackson Hole conference on Friday. The market is down to discounting 10bp of tightening for September, which translates into the implied probability of a hike of 40%.
At the start of this month, we were above 70%. Overall, the front end might stay better supported, but the issues plaguing the long end are not going away. We think this leaves a curve twisting steeper or even outright bearish steepening theme intact as our base case.
We had flagged last week that 10y US Treasury yields could well test beyond the 4.75% towards 5%. EUR: The long-end has been an issue, but there is no letup in short-end pressure Elevated deficits and high debt loads are not only a US issue, but something European bond markets have grappled with for some time already. France and Italy are the main concern currently, but even Germany is facing scrutiny with record-high issuance planned also in the years ahead. 10y Bund yields have risen to above 3.25% over the past week, the highest since 2011, albeit in a less volatile fashion.
The underlying energy situation, with increasing concerns surrounding gas prices, remains a more meaningful driver in the near term that keeps the market’s pricing of the European Central Bank aggressive even beyond the September meeting. And we are likely to see an energy-related rise in the flash CPIs coming from the individual countries this week, keeping that pressure alive. On the growth side, the latest round of flash PMIs pointed to an economy staying surprisingly resilient, offering the rates market little relief.
Sources & References
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