UBS On-Air: Paul Donovan Daily Audio 'Policy whack-a-mole'
The desk interprets the recent announcement by U.S. Treasury Secretary Besant about significantly increasing long-term government bond purchases as a critical response to rising yield pressures impacting affordability and debt servicing in the U.S. Per the full note from UBS's Paul Donovan, the immediate reaction was a rally in the bond market, pushing 10-year yields down to levels not seen for a week, which indirectly reflects political sensitivity amid rising mortgage costs and inflationary concerns. As yields decrease, they may provide a cushion against the affordability crisis, particularly relevant for institutional traders keeping an eye on USD pairs like EUR/USD and GBP/USD, which are influenced by U.S. economic health. With no immediate high-impact calendar events ahead, this context offers some stability but remains fluid as geopolitical factors evolve, particularly concerning tensions involving Gulf states and U.S. treasury holdings.
What the desk is arguing
The desk frames this as a multi-layered response from the U.S. Treasury, which is engaging in a type of policy 'whack-a-mole' to address the ramifications of higher borrowing costs created by geopolitical tensions and fiscal spending. Donovan emphasizes that these purchases are not just reactive, but a necessary step to curb the growing panic regarding affordability crises exacerbated by inflation and higher service costs on U.S. debt.
Supporting evidence includes the Treasury’s announcement, which could double its bond purchases, and the response seen in bond markets—10-year yields fell significantly. Such movements have direct implications for the .U.S. affordability crisis, where even minor shifts in yield can affect mortgage rates, thereby impacting economic conditions and consumer confidence, further illustrated by the potential political fallout.
Where it sits in our coverage
Current consensus targets for EUR/USD highlight a median of 1.1700 across firms, with notable targets including ubs at 1.2000 and morganstanley at 1.2000 for March 2026. The desk’s perspective aligns with this upward view, particularly as yields stabilize, offering some support to the currency.
How other firms see it
The general consensus among firms like ubs, morganstanley, and commerzbank suggests a bullish stance on EUR/USD in the medium term. In contrast, there are firms like anz and deutschebank who provide lower targets, reflecting cautious positioning in light of uncertainties surrounding U.S. fiscal policies and geopolitical risks. The dynamics of the EUR/USD trajectory can also be closely tied to developments in U.S. policy responses and inflation indicators, making these factors essential to monitor moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The U.S. Treasury's bond purchase announcement catalyzed a rally in the bond market, reducing yields and addressing rising mortgage costs.
- 02Current bond market actions underscore the growing political concern regarding U.S. debt affordability amidst inflation pressures.
- 03Consensus indicators show a bullish outlook for EUR/USD, with targets pointing toward potential appreciation which can be linked back to easing yield pressures.
- 04Geopolitical dynamics, particularly involving the Gulf region, could influence U.S. fiscal health and consequently the USD's strength.
Market implications
Traders should monitor the EUR/USD level closely as it approaches the consensus target of 1.1700. Additionally, watch for any shifts in bond yields, as further drops could influence broader currency trading strategies, particularly against the backdrop of the macroeconomic indicators ahead.
Risks to this view
The outlook could be undermined by unexpected geopolitical escalations, especially if Gulf states utilize their Treasury holdings to finance military actions or reconstruction. Additionally, shifts in inflation data that drive yields higher could create a reversal in trends affecting U.S. debt service affordability.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1725 |
Deutsche Bank | Neutral | 1.1668 |
J.P. Morgan | Bearish | 1.1300 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Thursday the 20th of August. U.S. Treasury Secretary Besant announced an intention to at least double purchases of U.S. government long-term bonds.
The response in the bond market was a rally, taking 10-year U.S. government bond yields down to levels not seen for a whole week. It might also offer a faint sense of panic in the administration about the consequences of higher borrowing costs, which have implications, amongst other things, for the U.S. affordability crisis via mortgage costs. The Gulf War, to take one particular policy, has potentially added to bond yields.
There is increased fiscal spending putting pressure on real yields. There is increased inflation. There is increased uncertainty about both fiscal spending and inflation.
There is increased distrust of the United States amongst some significant holders of U.S. Treasuries. There is the increased risk of Gulf states using their Treasury holdings to finance reconstruction and rearmament if the war ends, or, indeed, even if it turns into a forever war.
Of course, the U.S. government did not have higher bond yields as an objective when attacking Iran, but that has been a consequence. And in the game of policy whack-a-mole, the Treasury is responding with a new policy to deal with the consequences of the old. However, it is worth remembering that commentary around the bond market might be distorted by views on other government policies.
Negative views on the war, or tariffs, another force for higher bond yields, or indeed tax cuts may encourage reports that stress the negative when it comes to U.S. government debt. It is worth remembering, amidst this, that U.S. federal debt-to-GDP ratios are below the record highs this level of debt has been funded before. More significantly, when considering funding, debt-to-private wealth ratios are actually very low, and wealth is likely to be mobilized in the future to help finance government debt.
One additional layer of uncertainty for bonds has been the failure of U.S. Federal Reserve Chair Walsh to provide any concrete framework for policy. Walsh has instead retreated into a cloud of platitudes during the limited number of public statements that have been offered, which increases speculation and thus adds a risk premier into financial markets.
The Fed Minutes released last night showed even less desire for transparency, with Walsh proposing fewer Fed meetings be held. No decision was taken on that. At a time when structural change is increasing the risks in the financial markets, the wisdom of fewer formal policy meetings might perhaps be challenged.
Sources & References
How we cover this story
Related news on this pair
1.1700: Euro hits three-month highs as US Bond buyback plan crushes the US Dollar
US bond buyback announcement signals fiscal concerns and potential USD supply pressure; EUR/USD break above 1.17 tests key technical resistance.
US treasury bond surprise drives Gold and EUR/USD higher. Crude Oil elevated [Video]
Unexpected Treasury weakness pressures USD duration positioning and reduces carry appeal, likely benefiting EUR/USD in risk-on environment.
Euro: Upside bias targets 1.1725 against US Dollar – UOB
UOB technical bias points to EUR/USD resistance near 1.1725; relevant for positioning ahead of key economic data or policy signals that could validate or challenge this directional view.