U.S. Labor Market Will Put Pressure on the Dollar, While Easing Pressure on Long-term Treasury Yields

The bank argues that the recent rise in Treasury yields is driven by real yields and energy prices rather than fiscal concerns. In an analysis note, Citigroup said the increase in energy prices and growth dynamics have pushed bond yields higher, with the move largely coinciding with real yields and energy prices. The bank's analysts argued that budget deficit concerns, inflation expectations, and borrowing issuance by big tech companies have had only a limited impact on yield increases, predicting that the market's main "pressure valve" will shift to the foreign exchange market.

Citi maintains a short position on the dollar against the euro, gold, and high-yielding emerging market currencies, while keeping a positive stance that supports risk appetite in U.S. equities. The decline in oil prices and the loss of momentum in the labor market could also ease pressure on U.S. Treasury Secretary Scott Bessent, who has initiated bond buybacks to lower borrowing costs. Citi strategists added that, in light of these market-easing developments, no radical steps are expected in borrowing issuance or fiscal policy ahead of the quarterly borrowing announcement due on November 2 and the midterm elections on November 3.