UBS On-Air: Paul Donovan Daily Audio 'Four billion dollars'
The desk interprets recent comments from US Treasury Secretary Bessent regarding proposed Treasury buybacks as a sign that the bond market has caught the attention of the US government, albeit with an unimpressive $4 billion figure. Per the full note from UBS, the bond market reaction indicates this is insufficient to significantly alter yield expectations, as evidenced by the rise in yields following the announcement. Current market sentiment does not reflect a return to the tumultuous conditions of the 1994 bond market crash, despite an emphasis on fiscal consolidation and heightened geopolitical tensions surrounding Iran's sanctions. Overall, the anticipation of future policies remains a critical conversation within the bond and FX markets.
What the desk is arguing
The desk frames this as a pivotal moment where government intervention in Treasury markets may signal policy shifts, albeit with limited immediate impact. The $4 billion proposed buyback comes amid an environment where investors seek more substantial commitments to stabilize or lower bond yields, especially as yields have reacted upward post-announcement.
The recent commentary is underscored by broader themes of fiscal consolidation, where Bessent hinted at looking into waste as a means to address fiscal deficits—a strategy skeptical economists perceive as ineffectual. Bessent's remarks also note looming sanctions against Iran, which could have further implications for inflation and market stability.
Where it sits in our coverage
For EUR/USD, our internal consensus target currently sits at 1.1634, with range estimates from various firms indicating a narrow dispersion, notably ubs at 1.2000 and commerzbank at 1.2200 for Dec-26. Closer observation of GBP/USD reveals a median target at 1.3500, with firms like morganstanley pointing towards 1.4700 in the same time frame.
This view aligns closely to the consensus surrounding EUR/USD and GBP/USD targets, although it reflects a cautiously optimistic stance given the ongoing market volatility. Particularly, UBS’s elevated target for EUR/USD suggests confidence in potential Euro strength against the backdrop of the US fiscal narrative.
How other firms see it
Firms aligned with this cautious outlook include ubs and morganstanley, suggesting a tempered expectation for currency movements tied to shifting fiscal strategies. In contrast, firms reflecting skepticism on aggressive movements include citi and goldman, projecting lower targets reflecting concerns over external inflationary pressures.
A close examination of the USD/JPY trajectory might provide further insights, particularly as the BoJ grapples with its ongoing strategy amid US Treasury developments—watch for spillover effects as inflation data and policy adjustments unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The proposed $4 billion Treasury buyback is seen as insufficient by markets.
- 02US fiscal consolidation discusses waste reduction, receiving skepticism from economists.
- 03Geopolitical tensions regarding Iran's sanctions may influence inflation outlook.
- 04Current consensus targets suggest a cautious alignment with the potential for currency strength.
Market implications
Focus on yield reactions in bond markets as they may influence currency pairs directly, particularly EUR/USD around the key technical level of 1.1700. Monitor developments regarding sanctions against Iran as they could provoke volatility in inflation expectations and thus, FX rates.
Risks to this view
An unexpected escalation of sanctions against Iran or evidence that the government’s fiscal measures are effective could cause a reassessment of inflation expectations, leading to a shift in bond yields and corresponding FX moves. If these measures fail to stabilize inflation, it could prompt a significant shift in market outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
UOB | Bullish | 1.1725 |
Deutsche Bank | Neutral | 1.1668 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 21st of August. US Treasury Secretary Besant rushed to CNBC yesterday to declare that not only would the US government be buying long-dated treasuries, but that the amount would be $4 billion.
To judge from the bond market reaction, I cannot be the only economist mentally replaying the Austin Powers meme of Dr Evil demanding $1 million. $4 billion of Treasury buybacks might have had an impact once, but in the modern world such a sum is not considered terribly significant. However, it is unwise to become too alarmist. The sell-off in bonds is hardly a rerun of the 1994 bond market crash.
Besant's actions make it clear that the bond market has caught the attention of the US Treasury. The question is whether it can catch the attention of the US President and lead to policy changes. Besant did make two other announcements.
There is an increased focus on fiscal consolidation, apparently. Economists are likely to treat this sceptically. Waste and fraud were specifically mentioned as areas where money could be saved.
And investors tend to think that solving fiscal deficits in advanced economies by chasing waste is a waste of time. Besant also said that the economic warfare against Iran will be unveiled on Monday. Economic sanctions tend to decay over time, and Iran has a lot of experience at finding ways around sanctions.
If the sanctions turn out to be insubstantial, then markets' optimism bias may reassert itself with speculation about the prospects for reopening the Strait of Hormuz. If, however, the sanctions are more aggressive, in particular towards trading partners of Iran, this is not likely to quell fears about inflation and problems for the Federal Reserve. US gasoline prices continue to creep higher, using tariffs on imports from countries that trade with Iran would potentially add to other areas of US inflation.
South Korean early export data for August showed continued strength in the artificial intelligence investment story, with semiconductors leading the export figures higher. There were especially strong exports to China this time. The Korean won has been appreciating of late.
This might be viewed as what economists know as the Dutch disease. The sudden discovery of a valuable commodity, oil in the case of the Dutch in the 1970s, leads to currency appreciation, which does not damage the new industry particularly, but which then does have implications for other sectors of the economy. The Bank of Korea did tighten policy at its last meeting, and it meets again next week.
Sources & References
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