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US Treasury yields should have more room to the downside into year-end, but we’d have a floor at 4% for the 10yr yield. Any break below that and we’ve gone too far. For the eurozone we see plenty of risks for lower rates in the near-term, including growth worries, (geo)politics and the European Central Bank’s keenness to get down to neutral.

US Treasury yields on a drift lower, as anticipated
 

The Trump trade is done for now. In fact it drifted away through the course of last week. While nominations for various posts are important, it's the actual policy agenda that really matters, and that's not a thing till 2025 (from 20 January to be exact). Over the coming couple of months the data released will have minimal to no impact from a future Trump. It's back to contemporaneous economy watching for markets, and that mostly reflects a weakening trend in the data.

The question then is whether yields can continue to drift lower. Our baseline view is they can, but we'd have an implied floor at 4% for the 10yr yield. The funds rate is not expected to get much below 4% according to the market discount. Given that, the 10yr yield should not really get below 4% at all. This mark this cycle is different from previous ones, where a new low is typically hit by the 10yr yield as the Fed continues to cut rates. Historically this has typically reflected a deepening in the rate cut expectations, whereas here, the degree of rate cuts discounted has instead been pared back.

We stick to a contrarian ease lower in the 10yr yield into year-end, and that could well continue into January. The push can come from some weakening in activity data. But there is also a drive from the likelihood for a go at a 50% retracement of the move from 3.6% to 4.45% for the 10yr yield. Leave trading the Trump oomph trade on pause till February 2025.

Trump choosing market-friendly Treasury secretary
 

The announcement of Bessent as Trump’s Treasury secretary was well-received by US markets. With a hedge fund background Scott Bessent knows not to upset markets and his ambition to reduce the government’s deficit to 3% of GDP rhymes well with that. Equity markets opened higher, but longer-dated US Treasury bonds were the biggest winner here, with the 30Y yield down some 10bp on the day. The fiscal discipline was also seen in UST-SOFR spreads, which nudged up by some 2bp for the 30Y tenor, reflecting expectations of lower issuance pressure.

The spillovers to the eurozone were limited and the general attitude towards Trump’s upcoming presidency is one of wait-and-see. With weak PMIs from last week still resonating, we think domestic growth concerns remain the focus for EUR rates for now. The Ifo survey on the German economy came in slightly better than expectations, but we have to say consensus was positioned already fairly pessimistic.

Mostly downside risks to EUR rates in the near-term
 

Even though we think the 10Y euro swap rate will find a path higher throughout 2025, in the near term we find it difficult to identify drivers to start that upswing. Growth data is showing no signs of recovery, (geo)political risks are high and the ECB has made its willingness to cut policy rates clear. EUR rates have also been kept higher by a 10Y UST yield of 4.3%, but if that number decides to come down, we could see a 10Y Bund yield approaching closer to 2% again.

A dip in euro rates would be temporary in our view. Going into 2025 the catalysts for higher rates should start picking up, including a recovery of eurozone growth, higher US rates and QT progressing in the background. But with Trump’s actual actions still up for debate, we doubt euro rates can make that move until after the inauguration in January. 

Tuesday's events and market views
 

There is little of note in the eurozone data calendars for Tuesday. However, we will have a busy slate of ECB speakers, certainly interesting in the wake of last week’s very disappointing PMIs. Among others we will hear from the ECB’s Villeroy, Rehn, Muller and Kazaks.

The US has the Conference Board’s consumer confidence index for November up for release, next to new home sales data and later the FOMC minutes of the 7 November meeting in which the Fed cut rates by 25bp.

In primary markets Italy will be active with taps of a 2Y bonds and two inflation linked securities (up to €3.75bn in total). Germany will auction €4bn in 5Y bonds. After Monday’s new 2Y note the US Treasury will sell US$70bn in new a 5Y notes and US$28bn in floating rate notes. 

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