US Treasuries losing the control they had

What the desk is arguing

The desk frames this as a significant shift in the dynamics of US Treasuries, with rising real yields suggesting that this instability could be more structural in nature. This perspective is underscored by the recent fact that the US 10-year yield spiked to 4.65%, adding momentum to fears about Treasury overshoot.

Supporting this narrative, traders have begun to react to the substantial shifts, with higher yields seemingly pressuring the broader market environment where FX movements are concerned. The implications of these yields ought to be assessed, not only through the lens of domestic interest rates but also in terms of their impact on currency pairs like EUR/USD and GBP/USD.

Where it sits in our coverage

Our internal coverage for EUR/USD sets a consensus target of 1.1900, while for GBP/USD it suggests a target of 1.3550 by December 2026. Noteworthy firm targets include: - Goldman: GBP (1.3600), EUR (1.2100) - MorganStanley: EUR (1.2000), GBP (1.4700) - Bofa: GBP (1.4000), EUR (1.1900)

This view aligns with the broader market sentiment, where the upper bounds of our forecast range on GBP/USD at 1.3550 are validated by projections from MorganStanley, suggesting potential upside if yields settle further in favor of the dollar.

How other firms see it

Several firms share the desk's view that rising real yields may pressure currency pairs negatively. For instance, JPMorgan and Goldman indicate near-term increases in targets for both EUR/USD and GBP/USD, supporting the current stabilization narrative. Contrasting this, Citi holds a more cautious stance, projecting a lower outlook for GBP/USD at 1.3200, pointing to broader concerns regarding rate divergences.

Key intersections with central bank guidance should be observed, particularly as movements in USD/JPY could reflect shifts in the Bank of Japan's rate path, given current trends on US yields.