THINK Ahead: Bessent versus the bond market
The desk contends that Scott Bessent's recent strategies to manage long-end Treasury yields will struggle against underlying fiscal constraints and congressional gridlock. Despite attempts to implement new buyback programs and engage foreign central banks in repurchase agreements, the U.S. fiscal deficit remains stubbornly high at around 6%. Per the full note by James Smith, Bessent's reliance on short-dated bills to fund these deficits raises further concerns about sustainable borrowing costs across the economy, which traders should monitor closely. Consensus forecasts for EUR/USD show a moderate appreciation trend, aligning with the potential for continued dollar weakness as these fiscal challenges unfold.
What the desk is arguing
The desk believes that Bessent's innovative approaches may not suffice to control long-term Treasury yields due to additional economic pressures. The U.S. fiscal deficit remains significant, and as highlighted by Smith, meaningful reduction of this deficit is contingent upon congressional action. Therefore, there is a structural limit to what can be achieved through administrative means alone.
This is particularly relevant ahead of the upcoming discussions at Jackson Hole, where key policy signals may emerge. Recent developments, such as the decision to increase the Treasury buybacks, suggest a tactical shift aiming to bolster borrowing dynamics; however, with the fiscal deficit at 6%, the long-term sustainability of these measures is uncertain.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1634, with projections ranging from 1.1200 to 1.2000 by December 2026. Notably, firms like morganstanley project a target of 1.1600, while commerzbank has a more aggressive outlook at 1.2200. This view aligns with the overall sentiment that suggests a steady inclination towards a weaker USD.
The desk's call aligns closely with broad-based expectations, sitting comfortably within the prevailing targeting range of major firms. However, this suggests an incrementally cautious pace, with some firms projecting towards the higher end of the range, indicating a potential for dollar depreciation.
How other firms see it
Firm consensus on long positions in EUR/USD appears to be gathering steam, particularly among goldman, anz, and hsbc, who each see potential upside towards 1.1800. Conversely, citi remains more skeptical, anticipating weaker performance at around 1.2400 in the same timeframe. This divergence accentuates the existing uncertainty in the FX landscape.
The observed trajectory of USD/JPY will also be crucial as it intersects with both the fiscal maneuvering of the U.S. and the Bank of Japan's policies around foreign reserve accumulation, which could impact currency dynamics profoundly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Bessent's fiscal strategies face significant constraints amid ongoing high U.S. deficits.
- 02Long-term Treasury yields are likely to remain volatile despite new buyback initiatives.
- 03Consensus forecasts reflect expectations for a weaker USD, particularly vs. EUR and GBP.
- 04Upcoming Federal Reserve interactions, particularly from Jackson Hole, could catalyze shifts in market sentiment.
Market implications
Traders should watch for sentiment around the EUR/USD, particularly as it approaches the 1.1700 level which remains critical for a breakout. Additionally, remarks from Fed officials during Jackson Hole may provide fresh insights into future monetary policy direction, impacting FX positioning.
Risks to this view
Should Congress enact significant measures that improve fiscal consolidation, the current bearish sentiment towards the dollar could rapidly reverse. Similarly, any unexpected strengthening in U.S. economic data could further bolster the dollar, conflicting with prevailing market positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
Opinions Opinion by James Smith THINK Ahead: Bessent versus the bond market Published 09:37 Bessent's bond market battle has thrust the thorny issue of the US deficit back into the spotlight this week. And in a week when Fed Chair Kevin Warsh takes to the podium in Jackson Hole, James Smith argues the very substantial borrowing on both sides of the Atlantic presents an awkward dilemma for the major central banks US Treasury Secretary Bessent has unveiled a new buyback programme for long-end Treasuries in an attempt to lower their yields Bessent versus the bond market Say what you like about Scott Bessent – and plenty of traders have this week – but you can't say America's Treasury Secretary isn't inventive. This week's surprise decision to expand an obscure Treasury buyback programme is just the latest in a series of attempts to cool the long end of the US bond market.
Encouraging foreign central banks (*cough* the Bank of Japan) to make greater use of the Fed's FIMA repo facility, helping them avoid selling Treasuries during FX intervention, fits the same pattern. So too does the Treasury's growing reliance on short-dated bills to fund America's gargantuan deficits. My colleague Padhraic has a good explainer on this week's drama.
The logic is clear enough. Most Americans finance their homes through 30-year fixed-rate mortgages, making Treasury yields far more important than the Fed funds rate for households and businesses alike. Lower long-term yields mean cheaper borrowing costs across the economy.
All of that may be true – yet that doesn’t mean any of it is truly in Bessent’s control. Take the fiscal deficit, which currently sits around 6%. Bessent said this week that he wants greater attention on fiscal consolidation.
Yet there is little he can do on his own. Beyond measures to reduce waste, curb tax fraud or trim spending at the margins, meaningful deficit reduction requires Congress. And with Washington likely to become even more divided after November's mid-terms, it’s hard to see difficult choices being made.
That’s especially true when you remember where America’s deficit problem is coming from. James Knightley had a nice note on this last year . It’s not low tax revenue.
And it’s not elevated discretionary spending on defence, education and the like. Both are around long-term averages as a share of GDP. The US deficit has risen due to higher mandatory spending Source: Macrobond, ING "> Source: Macrobond, ING Instead, the pressure comes from mandatory spending programmes like social security, which are being pushed higher by demographic trends, and from debt interest costs.
Sources & References
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