Research — 23 August 2026

Verdict

The Treasury's expanded buyback announcement provided only a brief rally before yields reversed, as the market concluded that buybacks do not address the underlying fiscal fundamentals.

Analysis

The Treasury's announcement on Wednesday that it would expand buyback operations to at least $4 billion per issue and increase frequency from two to four per quarter initially drove a sharp rally in long-end Treasuries. However, the move faded within 24 hours: 10-year yields rose 5.8bps to 4.71% and 30-year yields returned to around 5.25%. The market's skepticism is rooted in the view that buybacks are a liquidity operation, not a fiscal consolidation plan. Bessent's framing as a 'Treasury twist' and his reference to a 'big toolkit' did not assuage concerns about the underlying debt trajectory. The failure of the rally matters because it signals that tactical interventions alone cannot anchor long-end yields while energy prices are rising and the fiscal outlook remains unaddressed. The implication is that until a credible fiscal consolidation plan emerges, long-end yields will remain vulnerable to further upward pressure, and the debasement trade—gold, miners, and crypto—will continue to attract flows as a hedge against fiscal erosion.

Tension

The Treasury is now an active, tactical player in the bond market, but the market is treating its interventions as insufficient without fiscal follow-through.

What changed

The buyback expansion was announced Wednesday, initially rallied bonds, then reversed Thursday as the market digested the lack of fiscal consolidation.

Desk views

Deutsche Bank notes the rally faded and 10-year yields rose 5.8bps to 4.71%, with the sell-off reinforced by rising energy prices and the S&P 500 posting its biggest August decline.

Evidence IDs · P004

GS desk highlights that Bessent got more explicit—buybacks can be more than $4bn per issue, Treasury has a 'big toolkit,' and he is talking fiscal consolidation—but the market did not respond well to the follow-up communication, with most of the initial rates move reversing.

Evidence IDs · P010

JPMorgan argues that buybacks do not address fundamentals but reinforce debasement, and notes the Street is skeptical because buybacks do not address the underlying fundamental issues.

Evidence IDs · P017

Natixis contends that buyback hints will not yield sustainable benefits without a credible fiscal consolidation plan, and prospects for a convincing government fiscal strategy by next week remain low.

Evidence IDs · P022

Investor implication

Long-end yields are likely to remain under upward pressure until fiscal consolidation is credible. The debasement trade—gold, miners, and crypto—remains the preferred expression for investors seeking protection against fiscal erosion.

Trade expression

Long gold and miners as a debasement hedge; avoid adding duration in long-end Treasuries until fiscal credibility improves.

Invalidation

A credible fiscal consolidation plan or a sharp reversal in energy prices could break the yield-energy spiral and restore confidence in long-end Treasuries.

Verdict

The dollar is vulnerable to further downside as markets price out Fed rate hikes and stretched long-USD positioning unwinds, with EURUSD expected to move toward 1.18-1.20.

Analysis

UBS argues that the case for further Fed rate hikes is fading as US inflation eases and labor data soften. If markets fully price out rate hikes and begin to consider potential cuts in 2027, still stretched long-USD positioning could unwind further. UBS maintains EURUSD forecasts at 1.18 for December 2026 and 1.20 for March and June 2027, with a new September 2027 forecast of 1.20. The dollar's vulnerability is reinforced by the Treasury's fiscal challenges and the market's skepticism toward buybacks, which undermines confidence in US assets. The implication is that dollar-funded carry trades and long-USD positions face increasing risk, while European currencies—particularly EUR and GBP—stand to benefit from improving fiscal and political backdrops. The tension lies in the fact that elevated oil prices and a still-hawkish Fed could temporarily support the dollar, but the medium-term trajectory points lower.

Tension

Elevated oil prices and residual Fed hawkishness could temporarily support the dollar, but the medium-term trajectory points lower as hike expectations fade.

What changed

The market narrative has shifted from expected Fed easing to Fed tightening, but the case for further hikes is now losing momentum.

Desk views

UBS CIO expects EURUSD to move toward 1.18-1.20, particularly if the ECB follows through with another rate hike in September, while a renewed Middle East escalation could temporarily support the dollar.

Evidence IDs · P025

AMFX notes the debasement trade peaked between October 2025 and January 2026 as the market went into a full bubble, twice, in a panic over the end of the USD, and that story ended with a bang.

Evidence IDs · P001

UBS FX Monthly maintains a preference for selected higher-yielding and pro-growth currencies, with NZD, GBP, CNY, and NOK Attractive, while Neutral on EUR and USD, expecting EURUSD to move gradually higher toward 1.20.

Evidence IDs · P026

UBS sees UK politics shifting from a headwind to a potential tailwind, with sterling relatively under-owned and room for further gains if investors reduce short positions, keeping GBPUSD forecasts at 1.40 in December and 1.41 in March and June 2027.

Evidence IDs · P027

Investor implication

Long-USD positions face increasing risk of unwinding. EURUSD and GBPUSD are the primary beneficiaries, with EURUSD expected to reach 1.18-1.20 and GBPUSD 1.40-1.41 over the forecast horizon.

Trade expression

Short USD against EUR and GBP; consider EURUSD call spreads or GBPUSD upside exposure as positioning unwinds.

Invalidation

A renewed escalation in the Middle East or a sharp deterioration in global risk sentiment could temporarily support the US dollar as a defensive currency.

Verdict

Japan's inflation is accelerating, and the BoJ is set to raise the policy rate by 25bps on September 18, with the government becoming more supportive after the US joint intervention.

Analysis

Natixis argues that the BoJ is set to raise the policy rate by 25bps on September 18 as inflation pressure strengthens. The nationwide headline inflation expanded to +1.9% YoY in July from +1.6% in June, and all measures of underlying inflation rose faster. The CPI adjusted for food and energy was up +1.4% YoY from +1.2%. Higher CPI inflation has been driven by surging import prices at +29.1% YoY in July from elevated oil prices and weak yen. The government seems to have become more supportive of the BoJ's rate hike, at least partially due to the US joint intervention. GS desk notes Japan core CPI accelerated for a second month to 1.8%, in line with expectations, keeping a September BOJ hike firmly live (80%) with USDJPY still around 159. The implication is that yen strength could accelerate if the BoJ hikes and the Fed's hiking cycle fades, creating a policy divergence that pressures USDJPY lower. The tension lies in the fact that Japan's private investors are still buying US Treasuries, which could offset some of the yen's appreciation pressure.

Tension

Japan's private investors are still buying US Treasuries, which could offset some of the yen's appreciation pressure from BoJ tightening.

What changed

Japan's nationwide headline inflation expanded to +1.9% YoY in July from +1.6% in June, and the government has become more supportive of BoJ rate hikes.

Desk views

Natixis argues the BoJ is set to raise the policy rate by 25bps on September 18, with all measures of underlying inflation rising faster and import prices surging at +29.1% YoY.

Evidence IDs · P019

GS desk notes Japan core CPI accelerated for a second month to 1.8%, in line with expectations, keeping a September BOJ hike firmly live (80%) with USDJPY still around 159.

Evidence IDs · P010

Natixis highlights that Japan's private investors were still net buyers of US sovereign bonds in May, adding JPY 0.7 trillion, and the twelve-month moving average confirms continued, if slower, accumulation.

Evidence IDs · P021

Investor implication

USDJPY faces downside risk if the BoJ hikes in September while the Fed's hiking cycle fades. The policy divergence could accelerate yen appreciation, though Japanese private investor demand for US Treasuries may provide some offset.

Trade expression

Short USDJPY or long yen via options as the BoJ hike approaches; consider CHFJPY put spreads as an alternative expression of yen strength.

Invalidation

A sharp reversal in oil prices or a dovish BoJ surprise could weaken the case for yen appreciation.

Verdict

The euro area economy is showing resilience, with the composite PMI at 52.1 and manufacturing improving to 52.8, even as energy prices rise and services stall.

Analysis

Natixis reports that the August PMI survey for the Euro Area lost momentum after three consecutive months of improvement, but the composite index was broadly unchanged at 52.1, above the consensus expectation of 51.7. The manufacturing index continued to improve, rising by 0.9 points to 52.8 in August, against expectations of 51.8. The survey sub-components show a marked rebound in new orders (+1.4 points to 52.2), which lifted employment to 50.1, pushing it back above 50 for the first time since May 2023. Input prices continued to decline to 66.5, and output prices are easing gradually. The services index stalled, likely constrained by heatwaves and energy costs. CACIB notes that energy prices have risen sharply, with Brent climbing by USD9/bl since the last update, and higher energy prices accentuate the pressure for larger second-round effects going forward. The implication is that the euro area economy is holding up better than expected, which supports the ECB's case for another rate hike in September and underpins the euro's strength against the dollar.

Tension

Manufacturing is improving and new orders are rebounding, but services are stalling and energy prices are creating second-round inflation risks.

What changed

The manufacturing PMI rose 0.9 points to 52.8, beating expectations of 51.8, and employment pushed back above 50 for the first time since May 2023.

Desk views

Natixis highlights that the composite index was broadly unchanged at 52.1, above consensus of 51.7, with manufacturing improving to 52.8 and new orders rebounding, while services stalled.

Evidence IDs · P020

CACIB notes that energy prices have risen sharply, with Brent climbing by USD9/bl since the last update, and higher energy prices accentuate the pressure for larger second-round effects going forward.

Evidence IDs · P002

Investor implication

The euro area's resilience supports the ECB's case for another rate hike in September, which underpins the euro's strength against the dollar. However, energy-driven second-round inflation risks could complicate the outlook.

Trade expression

Long EURUSD as the ECB tightens and the Fed's hiking cycle fades; consider EURJPY shorts if BoJ hikes materialize.

Invalidation

A sharp deterioration in euro area growth or a dovish ECB surprise could undermine the euro's strength.

Verdict

US equities are in a choppy consolidation phase, with midterm election history suggesting two distinct drawdowns interrupted by a meaningful rally, and defensive sectors outperforming during drawdowns.

Analysis

RBC's analysis of the last two midterm election years (2018 and 2022) shows that conditions were choppy with two distinct drawdowns interrupted by a meaningful rally. Consumer Staples and Health Care outperformed during the drawdowns, while Financials, Industrials, and Materials outperformed in the rebounds. GS's Pasquariello notes that S&P has been chopping around the 7700 level, which recalls the two months spent chopping around 7500, and that consolidation at the index level obscures the churn beneath it. The violent seesawing of the momentum factor returned, with tech at the center of the dynamic. UBS raises S&P 500 targets to 8,100 for December 2026 and 8,400 for June 2027, driven by a stronger earnings outlook and growing confidence that profit growth can remain robust. The implication is that while the medium-term outlook remains constructive, the near-term path is likely to be volatile, with defensive sectors offering relative protection during drawdowns.

Tension

UBS is raising targets on stronger earnings, while RBC's midterm playbook suggests choppy conditions with defensive outperformance during drawdowns.

What changed

UBS raised S&P 500 targets to 8,100 for December 2026 and 8,400 for June 2027, driven by a stronger earnings outlook.

Desk views

RBC's podcast highlights that conditions in 2H18 and 2H22 were choppy with two distinct drawdowns interrupted by a meaningful rally, with Consumer Staples and Health Care outperforming during drawdowns.

Evidence IDs · P023

GS's Pasquariello notes that S&P has been chopping around the 7700 level, recalling the two months spent chopping around 7500, and that consolidation obscures the churn beneath it.

Evidence IDs · P015

UBS raises S&P 500 targets to 8,100 for December 2026 and 8,400 for June 2027, driven by a stronger earnings outlook and growing confidence that profit growth can remain robust through next year.

Evidence IDs · P028

Investor implication

Near-term equity market volatility is likely to persist, with defensive sectors offering relative protection during drawdowns. The medium-term outlook remains constructive, with UBS targeting 8,100 by December 2026.

Trade expression

Overweight Consumer Staples and Health Care during drawdowns; rotate into Financials, Industrials, and Materials during rebounds.

Invalidation

A sharp improvement in fiscal credibility or a de-escalation in energy prices could reduce volatility and support a more sustained rally.

Verdict

Gold and silver are in a renewed uptrend as the debasement trade returns, while copper is mispriced relative to the Korea/GLEN deal and onshore US stockpiles, and oil is near the top of its range but not running away.

Analysis

GS Materials notes that precious metals keep the interest intact, with Chinese buying renewed and silver seen as more interesting with less resistance around these levels. The desk suggests copper is mispriced relative to the Korea/GLEN deal and that onshore US copper stockpiles are a counterweight to the US/China Rare Earth dynamic. Iron ore is expected to go sideways at best, with BHP asserting strikes having no impact and steel margins compressed. JPMorgan reinforces the debasement trade via Gold and Miners, noting that the Treasury buyback setup reinforces debasement. The implication is that gold and silver remain the preferred expressions of the debasement trade, while copper offers a tactical opportunity if the market reprices the Korea/GLEN deal. Oil is near the top of its range but not running away, with Brent back around $93 after briefly touching $94.70.

Tension

Gold and silver are in a renewed uptrend, but oil is near the top of its range and not running away, suggesting the energy-driven inflation impulse may be contained.

What changed

Chinese buying of precious metals renewed after taking profits the last few sessions, and silver is seen as more interesting with less resistance.

Desk views

GS Materials notes that Chinese buying renewed, silver is more interesting with less resistance, copper is mispriced relative to the Korea/GLEN deal, and iron ore will only go sideways at best.

Evidence IDs · P011

JPMorgan reinforces the debasement trade via Gold and Miners, noting that the Treasury buyback setup reinforces debasement.

Evidence IDs · P017

Investor implication

Gold and silver remain the preferred expressions of the debasement trade, with silver offering better risk-reward due to less resistance. Copper offers a tactical opportunity if the market reprices the Korea/GLEN deal.

Trade expression

Long gold and silver as debasement hedges; consider copper longs on a repricing of the Korea/GLEN deal.

Invalidation

A credible fiscal consolidation plan or a sharp reversal in energy prices could weaken the debasement trade and pressure precious metals.