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

We see room for further steepening over the near term, driven by rising inflation expectations and rising term premium: we raise our YE 10-year and

30-year targets to 4.85% and 5.40%, respectively, and initiate 2s/10s steepeners. We expect no changes to nominal coupon auction sizes and next

week’s refunding. We think Treasury should remove “at least” from forward guidance. However, with political factors at play, it may wish to avoid

clearly signaling that an expected increase in duration supply is drawing nearer, which risks pushing the curve steeper. Given the November

refunding’s proximity to the midterm elections, if the guidance remains unchanged next week, Treasury may reserve guidance changes until 2027.

International Rates

Over the past couple of weeks, DM yields bear steepened across the board given a further rise in energy prices, fuelled by a continued re-escalation

in the US-Iran conflict and Houthi threats in the Bab-el-Mandeb Strait, combined with renewed tariff headlines and rising doubts over Fed credibility

following this week’s meeting. In terms of strategy, we see risks of further bear steepening in the US amid concerns over the Fed's credibility. In

Europe, we remain bullish on duration, seeing limited risks from the US-Iran conflict and expecting any near-term yield drift higher alongside a US

sell-off to prove short lived.

Currencies

 Two focal issues: resurgence in energy prices and rising interest rates; both supportive of USD and carry. Stay bullish USD pre-FOMC; USD has

one-sided sensitivity to oil and is undershooting rates. Higher energy prices boosting carry returns as exporters (importers) are high-yielders

(funders).