UBS On-Air: Paul Donovan Daily Audio 'The risk of fantastic savings'
The desk posits that current signals from US Treasury Secretary Bessent regarding long-term Treasury issuance are likely to keep 10-year yields subdued, with potential risks emerging from proposed fiscal stimulus measures such as the "DOGE dividend" from the Department of Government Efficiency. This initiative could create instability by undermining claims of fiscal savings, potentially leading to increased budget deficits that investors might view unfavorably. Per the full note, the increase in retail sales in the UK and the upcoming German elections add layers of complexity to the FX landscape as traders look for direction amidst these developments.
What the desk is arguing
The desk believes that Bessent's reaffirmation of the existing debt issuance plan will suppress long-dated Treasury yields, ultimately providing support for the USD's current strength. This outlook is contingent on the risks posed by the proposed DOGE dividend which may compromise fiscal credibility and investor confidence. The implications of such measures on the budget and bond market are likely to be significant given the delicate balance of the current economic recovery.
In the current environment, 10-year US Treasury yields have been falling, leading to lower borrowing costs and reflecting a cautious approach amongst investors. This trend is evidenced by the ongoing adjustments in yield spreads and their reflections in currency valuations, specifically in pairs like EUR/USD and GBP/USD.
While the proposed fiscal measures might be perceived as populist and beneficial in the short-term, the desk asserts potential long-term risks, especially if these dividends do not translate into genuine economic savings or result in additional deficits.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0110-year US Treasury yields are under pressure due to signals from Treasury Secretary Bessent.
- 02The proposed DOGE dividend could undermine fiscal credibility, posing risks to the USD.
- 03UK retail sales data showcases resilience, though it diverges from broader economic sentiment.
- 04The outcome of the German elections may influence EUR/USD positioning in the near term.
Market implications
Traders should closely monitor 10-year UST yields, currently trending lower, and any announcements regarding the DOGE dividend initiative. A movement below 1.40% on the 10-year yield could indicate a shift in market sentiment, which may ripple into core currency pairs like EUR/USD and GBP/USD.
Risks to this view
A reversal in this outlook could occur if the proposed fiscal measures yield actual economic growth, allowing for an upside surprise in inflation data. Additionally, if yields stabilize or rise significantly due to other macroeconomic factors, it may undermine the present thesis, prompting shifts in FX positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 21st of February. US 10-year government bond yields have declined, as US Treasury Secretary Besant signalled an intention to broadly continue with former US Treasury Secretary Yellen's funding profile.
That means no meaningful increase in longer-dated bond issuance as a share of the total. This work may, however, be undermined by recent talk about what is referred to as a doge dividend cheque being mailed to US taxpayers. The idea here is that a proportion of savings from the so-called Department of Government Efficiency would be sent to taxpayers.
The problem with this is that there is a considerable difference between what is claimed to have been saved and what economists think actually has been saved. And if lost tax revenue is taken into account, the number might actually turn negative. Basing payments off fictitious savings would be a deficit-funded stimulus cheque, and the impact of that on the budget deficit would be troubling to bond investors.
UK retail sales were stronger than expected in January. It's almost as if the negative sentiment of the retail sector had somehow become detached from reality. This was led by a bounce in the volume of food sales, with online sales from non-store entities also stronger.
As is typical for the start of the year, the government ran a budget surplus. Data from February is also going to be needed to fully capture annual self-assessed tax revenues, however. German elections are held on Sunday, although investors will be focused on the structure of the next government and the policies it will pursue.
That is something that could take a considerable time to emerge. Government formation depends in part on which parties manage to breach the 5% minimum vote that is required to have entry into parliament. Broader focus is likely to be on the performance of the far-right alternative for Deutschland.
Prejudiced politics and economic nationalism are trends that have their roots in economic fear about the future, and they are also potentially very economically destructive at a time when economic success depends on having the right people in the right job at the right time. There is the release of final Michigan consumer sentiment data for February. The primary value of this survey is for entertainment purposes, as the political polarisation is so acute that the results are only normally useful for comedy.
There may be some very marginal use from today's data, however. Approval for US President Trump and Musk's economic policies has fallen quite sharply in conventional opinion polls, and comparison with the later results of the final Michigan data to the earlier results when approval of Musk and Trump was higher may give a sense of whether this is due to more intense outrage from Democrats, which is unlikely to have any implications, or whether Republicans are starting to sour on the economic outlook too, which might possibly impact government policy direction. That's all for today.
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