People can identify conflicting impulses from next week's US election. If betting on the market is correct and Trump wins, then US bond yields are likely to continue rising. But at the same time, Trump's victory may bring problems to the risk assets of the euro zone, pushing up the purchase of German treasury bond bonds. Prior to this, Friday's US non farm payroll report is crucial and may weigh on US Treasury bonds.

US Treasury yields hit 4.3%, marking a significant rebound in yields after the first rate cut

On Monday, the yield on 10-year US Treasury bonds briefly hit 4.3%, marking a 70 basis point increase since the Fed cut interest rates by 50 basis points on September 18th. We have always emphasized that it is not uncommon for the yield of 10-year US Treasury bonds to rise after the Federal Reserve's first interest rate cut. In fact, in the past few decades, the probability of this happening has been about 50%. However, the increase usually does not exceed 50 basis points. Therefore, the cumulative change of 70 basis points is significant.

The change from 3.6% to 3.85% is due to the upward trend of the 10-year US Treasury yield after the first interest rate cut boom. The change from 3.85% to 4.10% was due to the previous non farm payroll report, and its robustness almost exceeded everyone's expectations. The subsequent increase from 4.1% to 4.3% was the result of the combined action of two factors. Firstly, most of this week's data is expected to be stable (for example, Q3 GDP is expected to be 3%, and core PCE may be 0.3% MoM). The second one is the expansion of Trump's discount, based on the theory that the situation in 2016 will repeat itself, when the 10-year US Treasury yield rose by 50 basis points in the first week after the election results were announced.

The biggest question is whether the Trump deal has been completed. There is still a whole week left until the election, and the betting market still believes that Trump is the winner. Considering the various situations we are currently facing, the 10-year US Treasury bond is not in the mood to decline. But there is a potential unexpected factor that we need to experience, which is Friday's non farm payroll report. The impact of hurricanes and strikes in the report makes it possible for it to be underestimated. In the past week, the estimated numbers have actually been decreasing every day. The latest one is 110000, although it is weak, it is not catastrophic. The unemployment rate is estimated to remain stable at 4.1%, please note this as the bearish tone persists.

That is to say, the possibility of an unexpected downturn in this special employment report is greater than usual. If we get a result of 50000 (or even in the range of 50000 to 100000), it may be enough to signal a pause in the bearish tone of the US Treasury market, but we are about to enter next week's election. Bulls in the US Treasury market will be concerned about the possibility of Trump winning, which limits the downward space for 10-year US Treasury yields. If the employment report shows substantial weakness, such as below 50000 people, it will lead to the election results taking a back seat as market interest rates will significantly decrease.

But unless or until we confirm substantial weakness in the employment report, we will maintain a tactical bearish preference for the 10-year US Treasury yield at the same time.

Many events may trigger a decrease in euro interest rates

In the eurozone, driven by the decline in oil prices, dovish sentiment continues, and the market currently expects the ECB to cut interest rates by another 125 basis points by mid-2025. The implicit endpoint is around 1.75%, which seems to be getting lower and lower than the neutral zone. Considering that the latest economic data does not support this pessimistic sentiment, this is largely attributed to the US election. Given that the European Central Bank has hinted at a strong willingness to further relax monetary policy, we question whether there will be a shift in the euro interest rate market before the election results become clear.

In addition, on these days of considerable events, the back end of the curve may find itself lower. The 10-year ESTR OIS rate is now 2.25% and is becoming more independent of the 10-year EUR yield. In the United States, Trump's victory is seen as an inflationary factor, while concerns over trade tensions are weighing on eurozone interest rates. The uncertainty surrounding the 10-year euro swap rate remains high, and the implied volatility for the next three months is expected to rise again next week.

There may be multiple factors contributing to the downward risk of Euro interest rates, which could result in a significant drop next week. From the perspective of the eurozone, CPI data may (once again) unexpectedly decline, US employment data may not meet expectations, and then Trump's victory will seriously damage the risk sentiment in the eurozone. Taking all these factors into consideration, we are likely to see the 10-year OIS break through the 2% mark in the short term.