UBS On-Air: Paul Donovan Daily Audio 'In bondage?'
The desk interprets the recent movement in US Treasury yields, which have surged above 5%, and its effects on the USD/JPY currency pair, highlighting that this could signify a shift in trading sentiment. Per the full note from UBS, the aggressive rise in yields has startled newer generations of traders, while older cohorts remain comparatively unfazed. Current market sentiment reflects precariousness as the USD/JPY floats back above the 158-level amid fluctuating interest rates and mixed messages from central bank policymakers. Facing little scheduled in the near-term economic calendar, the desk maintains a cautious outlook amidst these conflicting signals.
What the desk is arguing
The desk posits that the uptick in US 10-year Treasury yields, now comfortably exceeding 5%, suggests heightened market volatility, particularly impacting USD/JPY dynamics as it crosses back above the 158 threshold. Per the full note from UBS, this raised anxiety among newer Generation Z bond traders in response to substantial single-day yield increases.
A notable shift witnessed in Treasury yields reflects a market struggling with hawkish central bank rhetoric and a recent disappointing bond buyback announcement. A pivotal moment approaches with the upcoming summit between the US and China, although immediate market impacts are regarded as muted amidst prevailing pessimism regarding substantial agreements.
Where it sits in our coverage
Our consensus target for USD/JPY stands at 152.0, with a range of 147.0 to 161.7 according to various firms. Notably, socgen sets their Dec-26 target at 160.0, while morganstanley projects a target as low as 140.0, demonstrating a divergence in outlook among analysts.
The desk's current view aligns closely with the broader consensus but chooses to position itself at the higher side of the spread. This positioning reflects an expectation of continued volatility in response to forthcoming fiscal maneuvers and rhetoric from key financial authorities.
How other firms see it
Firms like rbc and socgen appear aligned with our stance while projecting targets similar to our forecast range. In contrast, firms such as morganstanley indicate a more bearish perspective, anticipating further declines in USD/JPY.
Investors should also monitor movements in EUR/USD, as European Central Bank’s communications may further impact dollar dynamics, especially as the lagging effects of Fed policies unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US 10-year Treasury yields surpassing 5% indicates heightened volatility in markets.
- 02USD/JPY surpassing the 158 level reflects shifts in market sentiment amidst Federal Reserve messaging.
- 03Expectations are low for substantial outcomes from the upcoming US-China summit on trade relations.
- 04The cautious perspective among older trading cohorts contrasts significantly with younger traders' reactions.
Market implications
Traders should closely observe the USD/JPY as it remains sensitive to shifts in Treasury yields and signals from central bankers, particularly at the 158 level. The upcoming US-China summit may also introduce brief volatility, though its impact on monetary policy remains uncertain.
Risks to this view
Should Treasury yields fall back below 5% or if the US and China broker unexpectedly positive outcomes from their summit, the current bearish sentiment towards USD/JPY could destabilize, leading to a potential retraction from the recent highs.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 1.1500 |
Scotiabank | Bullish | 1.1700 |
ANZ | Bullish | 1.1700 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 24th of September. The US 10-year Treasury bond yields are comfortably back above 5%.
The dollar-yen exchange rate is back above 158. If US Treasury Secretary House Besant has any career hopes after this role, they probably should not include running a casino. The rise in bond yields has caught attention because it's sizeable by recent standards, but there's a rather frantic casting around for reasons to justify the shift.
Gen Z bond traders brought up on a diet of avocado toast and one or two basis point bond moves are naturally alarmed when yields rise by 15 basis points in a single day. Gen X traders brought up on full English breakfasts and yield moves of twice yesterday's shift are inclined to be a little bit more blasé. The seesaw of opinion on the Gulf, some hawkish comments from US Federal Reserve Governor Barr and a rather poorly received announcement from the US Treasury of buying back bonds are being cited as creating a climate that was not especially yield-friendly.
Today marks the much-talked-about summit between China's President Xi and US President Trump. Much-talked-about does not necessarily translate into much relevance for financial markets. The United States has retreated from trade tariffs on US importers of goods from China by extending the truce with China for another couple of months.
This sort of shift was expected and it's not something that really changes much in terms of economic fundamentals. Expectations for anything of substance coming out of the summit are really quite low. And there's always the question of whether Trump would then shift stance on any agreement post the summit, which reduces the impact of any immediate announcements.
Although markets' lingering traces of the optimism bias would probably keep some kind of reaction in place. The speculation about the United States banning diesel exports has continued, uncertainty being the dominant factor. US Energy Secretary Wright says a diesel export ban won't work to push down prices.
And in that, Wright is probably right. However, this needs to be weighed against the politician's paradox. We must do something.
This is something. We must do this. Social media has created a world where gestures count for more and reality counts for less.
The outcome of all these deliberations probably does matter to financial markets, as there will be inflation implications. But the noise in the meantime makes it purely speculative. We have more Central Bank speak, which will be interesting alongside the excitement of the bond markets.
Sources & References
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