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Treasury Yields Diverge as Rate Cut Bets Surge, Eurozone Rates Hit New Highs
Markets are closely watching the shifting landscape of interest rate expectations, with a notable divergence emerging between US Treasury yields and the growing anticipation of a December rate cut. Simultaneously, the eurozone is experiencing upward pressure on rates, testing new highs and raising concerns about potential breaches of key thresholds.
US Treasury Yields and the Rate Cut Discount
The correlation between US Treasury yields and the increasing probability of a December rate cut weakened this week, following a period of alignment. Last week,yields moved in tandem with the rapid rebuilding of expectations for a rate reduction. However, that pattern shifted on Monday, influenced by a more hawkish stance from the Bank of Japan.
the 10-year Treasury yield attempted to fall below 4% last week but ultimately settled around the 4.1% level, a key area of stability since early September. Despite underwhelming economic data, conditions haven’t been dire enough to fuel a significant rally in the bond market. November data,while not strong,saw an acceptable employment number and elevated ISM prices,hovering near 60. Furthermore, recent bond auctions have “tailed” – indicating weaker-than-expected demand – though not in a catastrophic manner.
One analyst noted the remarkable speed at which the market priced in a December rate cut, jumping from a 25% probability to nearly 100%.While acknowledging pockets of weak data, there’s also been evidence of economic resilience, such as steady jobless claims. “we’re okay with the morph to a preferred rate cut,as we’ve been calling for it,” a senior official stated. However, the primary driver behind this dramatic shift appears to be the lack of pushback from federal Reserve Chair Powell regarding these expectations. The market interprets recent comments from Williams as implicitly endorsed by Powell.
Eurozone Rates Face Inflationary Pressure
In contrast to the US, the eurozone is confronting rising rates, with markets testing new highs. While currently tilted towards downside inflation risks, limiting the upside potential for euro swap rates, the possibility of a breach of key levels is growing. The 10-year inflation swap currently sits at 1.94%, below the European Central Bank’s (ECB) long-term target of 2%.
A potential peace deal with Russia contributed to a slight decrease in inflation expectations in November, lowering gas futures prices for 2026 and potentially reducing pressure for increased defense spending. However, the 10-year swap rate touched 2.8% on Monday, highlighting underlying upside risks despite these disinflationary forces.
Euro rates have been impacted by the global rise in rates from Japan, the US, and the UK, leading to higher real rates. dutch pension reforms are also contributing to upward pressure on the long end of the curve thru increased payer swaps. According to a company release, if the eurozone does not undershoot the ECB’s 2% target in the coming months, a break above 3% for the 10-year swap rate is becoming increasingly plausible. This scenario hinges on a series of hotter-than-expected inflation numbers. The expected 2.4% reading on Tuesday, though, suggests that the 2% target remains distant.
Tuesday’s Economic Calendar
The eurozone’s core CPI number, with a consensus forecast of 2.4%, will be the key event to watch. US data releases are likely to be delayed due to the ongoing government shutdown. In terms of supply, the UK will auction £1 billion of 6-year Gilt linkers, and Germany will auction €4.5 billion of 2-year Schatz.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives.The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more.
Did you know? – US Treasury yields and rate cut expectations diverged this week. The market quickly priced in a december rate cut, driven by a lack of pushback from the Federal Reserve.
Did you know? – Eurozone rates are rising, testing new highs. The 10-year swap rate touched 2.8% on Monday, despite some disinflationary forces.
