Global Macro Outlook and Strategy: Global Rates, Commodities, Currencies and Emerging Markets

Research evidence excerpt

Global Macro Outlook and Strategy: Global Rates, Commodities, Currencies and Emerging Markets

Overall summary

US Rates

Money markets price an earlier and more aggressive Fed hiking path than our forecast, though with labor market data potentially suggesting policy

may not be restrictive and term premium normalizing, this justifies an upward sloping OIS curve. Global central bank tightening combined with

unattractive Treasury valuations versus other DM government bonds should anchor Treasury yields at higher levels, and could push yields higher

from here. We project 2- and 10-year yields will rise to 4.20% and 4.70%, respectively, at YE26. Stay short 10-year Treasuries versus Bunds, and

enter 10s/30s Treasury curve flatteners, as a soft-bearish trade with relative value. Given large funding gaps emerging in FY27 and beyond, we

expect Treasury to remove the “at least” from its forward guidance in August, to prepare for a multi-quarter series of coupon increases commencing

in February 2027. The administration's focus on lowering long-end yields increases risks this forward guidance change may be delayed, potentially

pushing coupon increases later into 2027. We adjust lower our projections for foreign demand for Treasuries, as well as our bank demand forecast

International Rates

 DM yields rallied across the board at the start of the week as the US and Iran reached an interim MOU to end the conflict and reopen the Strait of

Hormuz, but the move was partly reversed later in the week given a sharp front-end sell-off driven by a hawkish Fed delivery. Despite the US-Iran

MoU agreement, we think that uncertainty over a long-lasting peace will likely persist in coming months, with Iran possibly using its influence over the

Strait of Hormuz as leverage.