Credit Ágricole: FX Weekly - FJElite

Global rates markets are increasingly being driven by fiscal concerns rather than central bank policy, with front-end yields anchored while long-end yields continue to rise. Government borrowing needs, European budget negotiations, US midterm elections, the UK Autumn Budget and Japanese tax debates are creating greater scope for divergence across markets. The outlook remains cautious on G4 duration, as ongoing fiscal pressures could sustain upward pressure on long-term yields.

In Europe, the bearish view on rates curves persists as widening French OAT and Italian BTP spreads increasingly reflect sovereign credit concerns alongside changes in neutral-rate expectations. Further spread widening remains possible, while refinancing costs could gradually undermine debt sustainability among highly indebted governments. France’s RN counter-budget briefly eased OAT spreads, but uncertainty over implementation quickly reversed the move. Comparisons with Italy’s 2018 debt-market stress suggest further widening is possible, favouring steeper French OAT spreads against Bunds and tighter Italian-Spanish spreads. Meanwhile, rising energy prices and renewed debt-crisis concerns are reshaping inflation markets, with headline Eurozone inflation potentially approaching 4% and core inflation nearing 3% over the coming quarters.

In the US, Treasury yields have risen to fresh highs, partly reflecting bond supply and spillovers from higher European long-term rates. However, recent Fed commentary has signalled little urgency to raise rates in October, helping anchor the front end. Attention is turning to the $22bn 30-year Treasury reopening and September CPI, which will shape expectations for near-term monetary policy. The cautious stance on duration remains, as long-end yields could continue rising in the short term, while an inflation reading in line with expectations would likely limit further upside in front-end rates.