Rates Spark: What the… is going on?
The desk posits that the recent rise in long-end yields, particularly US real yields, reflects a move toward normalization rather than systemic instability, highlighting fiscal deficits as a key driver, per the full note source. This is underscored by the observation that the rise of US 10-year nominal yields is mainly attributed to a rise in real yields, with higher fiscal deficits across developed markets amplifying this trend. Our current EUR/USD consensus is positioned at 1.1700, slightly below the average of competing forecasts, and with no significant calendar events in the immediate term.
What the desk is arguing
The desk frames this as primarily a normalization phase in US yields, indicating that concerns over the drivers of this elevation may be overstated. According to the source, elevated US real yields are the core component behind the uptick in nominal yields, with fiscal deficits contributing significantly to the overall trajectory.
Notably, the commentary emphasizes that this increase in long-term yields does not necessarily indicate market distress, as credit spreads remain tight, reflecting robust demand for new issues despite increased supply. This aligns with the source's assertion that fiscal deficits, while persistent, have been a known factor in market conditions.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1700, with a range of 1.1200–1.2000, reflecting a moderate stance relative to other forecasts. Specific targets from key firms include: - commerzbank: Mar26 1.1900 - morganstanley: Mar26 1.2000 - ubs: Mar26 1.2000
This view sits in the middle of the cross-firm consensus and appears conservative given that it is just above the median of 1.1700 across surveyed forecasts.
How other firms see it
Several firms, including commerzbank and morganstanley, support similar upward pressures on EUR/USD given the rate dynamics and real yield contexts. In contrast, firms like anz project lower targets, suggesting they anticipate more muted movements.
The movement in USD/JPY is also pertinent, as shifts in US yields influence the BoJ's monetary stance and hence the JPY dynamics, substantiating a watchful eye on FX pair relationships amidst these shifts.
How firms align with this view
Key takeaways
- 01US real yields are driving higher long-end yields.
- 02Fiscal deficits are a persistent theme affecting global yields.
- 03EUR/USD consensus is positioned at 1.1700.
- 04No high-impact events are on the calendar.
Market implications
Traders should monitor the EUR/USD pair closely, particularly as it approaches the consensus target of 1.1700. A significant movement beyond this level could indicate shifts in market sentiment towards further yield normalization.
Risks to this view
Any reduction in fiscal deficits or a hawkish pivot from the Federal Reserve could reverse upward pressure on US yields, impacting FX pairs like EUR/USD and USD/JPY significantly. A sudden change in the macroeconomic outlook could also alter this narrative.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
UOB | Neutral | 1.1590 |
Société Générale | Bearish | 1.1400 |
Articles Rates Spark: What the… is going on? Published 18:48 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lots of supposition out there on the drivers of higher long-end yields. A chunk of it is simply a move to a tad above normal.
Higher US real rates is the engine. Getting to normal rates is a minimum ask (hope the BoJ is attentive). Eurozone rates suffer to boot on added energy and climate-related inflation concerns, as well as resuming issuance concessions Padhraic Garvey, CFA and Benjamin Schroeder Even with the rise in real yields, we are only a little above what we consider 'normal' rates It's all about US real yields, for the long end in particular We could tell a long story with numerous angles, but there is one theme that cuts through the lot – the elevation in US real yields.
That's what's going on. In the past six months, practically 100% of the rise in US 10yr nominal yield has come from a rise in the real yield. Drivers?
Is AI-induced long-duration issuance pressure the latest narrative? In part, yes, agreed. It’s up 10-fold relative to only a couple of years back.
But we're not sold that this is the explainer. Heavy corporate issuance is typically not a problem if there is strong demand, and there is strong demand. Credit spreads remain contained to boot.
It's only a part of the narrative, and nowhere near the largest part. There is absolutely the issue of higher issuance generally, globally, reflecting higher fiscal deficits right across developed markets. We’d argue that this is a bigger issue than the aforementioned AI issuance spree.
Fiscal deficits are not contained, and the longer they remain un-anchored, the more persistent is the anticipation for more issuance into the medium term. It’s an issue that has been with us for years now, and so not new. But absolutely relevant, as it’s persistent and not going away any time soon.
But we should not forget that a lot of the move is real yields simply getting back to more 'normal' levels. Before the Iran war, the 10yr real yield was 1.7% (low versus before the great financial crisis). It’s now 2.4%, which is actually close to normal (a 2+% handle would be normal).
That, in fact, is the biggest explanatory piece. 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.
Sources & References
How we cover this story
Related news on this pair
Euro consolidates below two-month high as US Dollar steadies
Euro: Range-bound before FOMC against US Dollar – ING
Euro: Overvaluation and energy risks weigh against US Dollar – MUFG
MUFG flags structural EUR overvaluation and energy headwinds as constraints on USD strength, suggesting mean-reversion risk for EUR/USD above fair value.