Newsletter · 2026-10-08 · Ashutosh Agarwal

The Fed Leans Toward Another Hike as Treasury Buyers Show Up - The Dollar Brief - Week of October 8, 2026

The Dollar Brief for the week of October 8, 2026 (podcasts published October 7 and 8): the Fed minutes leaned toward one more hike while a solid 10-year auction held yields off the 5.36 percent high, the euro gave back Tuesday's bounce as the France to Germany spread widened to 137 basis points, and Japanese repatriation emerged as a theme on several shows.

The Dollar Brief

Week of October 8, 2026: The Fed Leans Toward Another Hike as Treasury Buyers Show Up

Wednesday started badly for bonds and ended better. Early in the day the US 10-year Treasury yield hit 5.36%, its highest level in 24 years. In the afternoon the Fed released minutes from its September meeting, and they said most officials think one more rate hike is "appropriate" this year. On paper, that was bad news for bonds. Then the Treasury sold $39 billion of new 10-year notes, and demand was better than expected. Yields backed off. As CNBC's Steve Liesman put it on Fast Money: "We're still selling bonds. People are still buying." That is today's story. The Fed is still leaning toward tighter policy. The bond market has not given up on the US. And the dollar index is at its highest since about May 2025, mostly because of trouble in Europe rather than strength at home. The euro gave back Tuesday's bounce, the France–Germany spread widened again, and a story is spreading on several podcasts at once: Japanese investors may be bringing their money home. (Quick glossary. A "basis point" is one-hundredth of a percentage point. The "spread" is the gap between two countries' borrowing costs. The France–Germany spread shows how much extra France pays to borrow. "FOMC minutes" are the official notes from the Fed's rate-setting meeting, published three weeks later. A "real yield" is the interest you earn after inflation. "Repatriation" means investors selling foreign assets and moving the money back home.)

TL;DR

The Fed minutes leaned hawkish. "Most agreed it would be appropriate to hike again this year," and "many said it would make sense to hike on risk management grounds," Steve Liesman reported on Fast Money (Oct 7). Market odds: 17% for an October hike, 82% for December.
The 10-year auction went well. Yields hit 5.36% early, then eased after the $39 billion sale drew "higher than average bidding from non-dealers, which includes central banks" (same episode).
The euro gave back its bounce. On Saxo Market Call (Oct 7), John J. Hardy had euro-dollar back "below 112" after Tuesday's high near 1.1277. The France–Germany spread widened back out to 137 basis points, from about 127.
Japanese money is a theme on several shows. A Fast Money panelist called Japanese life insurers going home to 10-year Japanese bonds at about 3.20% "the risk for the Treasury." On Market Maker (Oct 8), Piers Curran said Japanese insurers are already selling French bonds.
Investors are betting on a weaker euro for longer. On the MUFG Global Markets Podcast, MUFG found bets against the euro in the options market running more than one standard deviation above normal. Investors are also buying protection that lasts months rather than days.
The marginal buyer of US debt has changed. Rebecca Patterson on Squawk on the Street (Oct 7): central banks used to be the swing buyers. Now it's hedge funds, and "they're a lot more tactical, which means more volatility."
Lazard expects big US deficits for years. Ron Temple on Squawk Box Europe Express (Oct 7): deficits of "6.5% to 8% of GDP every year for the next decade," with debt reaching 135% of GDP by the end of 2036.

What's New

What the Fed minutes said

Steve Liesman, CNBC's senior economics reporter, went through the minutes on Fast Money. The tone was firmly in favour of tighter policy:

Another hike this year: "Most agreed it would be appropriate to hike again this year."
Why: "Many said it would make sense to hike on risk management grounds. That is, provide insurance against this persistently high inflation we've had from supply shocks and strong demand."
Policy isn't very tight yet: "Several members saw the policy rate as only mildly restrictive or not restrictive at all, echoing the words of Fed Chairman Kevin Warsh."
Inflation: "Insufficient progress on inflation. Risk to inflation were to the upside." The labor market is "not a problem. It's close to full employment."
The main worry: higher prices "could eventually seep down into... inflation expectations and drive up wages." So why didn't markets panic? Since the meeting, Fed officials have softened the timing. Liesman said Vice Chair Phil Jefferson and New York Fed President John Williams "signaled, hey, if a hike is coming this year, it's unlikely to happen in October." That matches market pricing: a 17% chance of an October hike and an 82% chance in December. Liesman also pointed to a gap that will have to close at some point. The 2-year Treasury yield is around 4.76%, about "90 basis points over the Fed funds rate." His read: "Either the market reconciles where the Fed is or the Fed reconciles where the bond market is." His own bet: "I think there's at least one more hike left in the Fed." MUFG's currency team reached the same timetable last Friday on the MUFG Global Markets Podcast. They expect the Fed to "keep rates on hold in October, but then look to hike again in December." Their reasons were softer core inflation (the PCE measure) after revisions and a payrolls report that "did disappoint to the downside."

The auction was the bigger news for the dollar

The 10-year auction may matter more for the dollar than the minutes did. For weeks, a worry on these podcasts has been that foreign buyers are stepping back from US debt. Wednesday's sale didn't show that. Melissa Lee summed it up: the 10-year hit "5.36 percent early in the session," then backed off "following a stronger than expected bond auction... with higher than average bidding from non-dealers, which includes central banks." ("Non-dealers" are end investors such as fund managers, pension funds and foreign central banks, not the big banks that are obliged to bid.) Liesman gave it "sort of a B plus." He also offered a simple way to think about whether 5% yields are attractive:

"If you believe in Kevin and his 2%, and he's going to do it, and he's going to make it, take your five-year, subtract two from it, and that's your real yield for the next 10 years."

In other words, if you trust the Fed to bring inflation down to 2%, a five-year Treasury yielding close to 5% locks in almost 3% a year after inflation. If you think "three is the new two," you get about 2%. "That's not too bad," Liesman said, "but there's no reason to go way out the curve." He also raised a puzzle. Market measures of long-run inflation expectations (the "five-year, five-year forward") show "not much going on there." So why do bond yields keep rising with oil? "If it's not inflation, why is it oil?" His answer to whether the cause is growth or heavy borrowing: "I'm just going to say yes." He leans toward borrowing, including heavy debt-raising tied to AI. "There's places at the top of this thing that could care less if it's a quarter point." He made a point about the dollar's safe-haven role too. When France's bond yields jumped, "people ran to the safety of the American treasury. Remember... when they downgraded the U.S. treasuries? What did people do? They bought them."

The Japan question

The most important new idea this week isn't about the Fed. It's about Japan, and it now comes up on several podcasts. On the same Fast Money episode, Melissa Lee asked whether France and Japan mean "dollar strength should, in theory, continue." One panelist warned about a risk that is building quietly:

"If you're a life insurance company and you're a Japanese life insurance company, the yields in Japan are a lot more interesting than they've ever been. And they who are financing much of our deficit... So to me, the story is as much about concern when Japanese life insurance and real money decides to come back home to Japan and say, I will lock in on 320 in a 10-year JGB. That is the risk. That's the risk for the Treasury. I think that's Scott Bessent's thing that keeps him up at night."

(A "JGB" is a Japanese government bond. "320" means a 3.20% yield.) On Market Maker on Thursday, Piers Curran said this is already happening in Europe:

"There's a lot of Japanese institutional money coming out of France at the moment... they chose France as a really key destination. So they went, converted yen to euros, bought a load of French bonds, right? Well, now they're going, oops, that's probably a bad idea."

The effect on currencies, in his words: "It's also driving down the euro. The euro is at a 17-month low against the dollar, because people like big Japanese insurance firms are selling euros to convert their money back to yen, or maybe they're converting it to dollars to go and buy US government debt instead." That last clause is why this matters for dollar watchers. When Japanese money leaves Europe, some of it goes into dollars and pushes the dollar up. If Japanese money starts leaving the US too, the dollar loses one of its biggest supporters. This builds on what Standard Chartered's Steven Englander said on Tuesday, when he saw long-term Japanese yields as "kind of attractive" for the first time "in a couple of generations." For now, the yen isn't confirming the story. On Saxo Market Call, John J. Hardy noted the dollar was "still at 158 plus" against the yen, though "we've come off the highs." He sees 158.50, the 200-day moving average, as "really critical resistance" for dollar-yen. (A moving average is the average price over a period; traders watch the 200-day line as a marker of the longer-term trend.)

France: Tuesday's relief didn't last

On Tuesday the euro bounced after Marine Le Pen promised a debt-cutting "golden rule." By Wednesday morning most of that was gone. John J. Hardy, a strategist at Saxo, described the reversal on Saxo Market Call:

The France–Germany 10-year spread had "tightened all the way down to 127 basis points or so" on Tuesday. "We're back out another 10 basis points this morning," to 137. "I had to scratch out the number that I was going to say there a couple times this morning because it started a lot lower."
Euro-dollar's Tuesday high was "112.77 or something like that... And we've seen it back below 112 this morning."
Euro-sterling "just did tick below that 84.55 level from back in July. Therefore, the lowest level since early 2025... I think that trend is looking pretty well entrenched there."
"Euro just broadly under pressure here." He was skeptical of Le Pen's plan. It would cut France's contributions to the EU, keep the retirement age at 62 ("completely out of whack with reality") and cut fuel taxes, which would be expensive. "At the same time, Le Pen is out calling on the ECB to intervene to get French spreads lower. A little bit of irony in there. See if you can detect it." Critics say "the savings assumptions are very aggressive." On Thursday's Market Maker, Piers Curran had the spread wider still, at 150 basis points, and France's 10-year yield "nearing 5%. This is the highest they've been for 25 years." (Spread figures on different shows were quoted at different times and move during the day. MUFG had the spread near 160 last Friday.) His other numbers:
The deficit is projected at "5.4% of GDP this year, missing their 5% target." France has run a deficit every year since 1974.
Interest is now the biggest single cost in the budget. It's expected to be "85 billion euros just on debt interest" in 2027, ahead of education (€63 billion) and defense (€53 billion).
The level he says to watch: in the Eurozone debt crisis, "I remember 7 was a really red line in the sand... if Italy get to 7%, this whole thing's game over."
The calendar: France's presidential first round is April 18, 2027, with the runoff on May 2. Curran expects the runoff to be "Le Pen versus Jean-Luc Mélenchon," the far-left candidate who has talked about writing off the debt. "Firstly, no one on the planet would then lend to France again." Rebecca Patterson, the macro strategist and former Bridgewater executive, sees no quick fix. On Squawk on the Street she said "the French finance minister is now threatening to pass a budget without parliament. It's not going to fly. There will be a no-confidence vote... We'll have, what, six prime ministers in five years in France?" The core problem: "How do you stabilize your fiscal dynamics when voters are going to throw you out of office if you don't spend more?"

Investors are betting on a weaker euro for longer

The best piece of positioning data this week came from MUFG, Japan's largest bank. It was recorded last Friday, but it explains why the euro's bounces keep fading. Currency analyst Abdul Ahad Lockhart tracks options trades reported to the DTCC trade repository. (Options are contracts that pay off if a currency moves past a set level. Buying "puts" on the euro is a bet, or insurance, against it falling.) On the MUFG Global Markets Podcast he found:

Demand for euro puts "exceeds one stand[ard] deviation above normal levels" across almost every maturity. "Investors are increasingly positioning for further euro downside rather than expressing short term hedging demand alone."
The bets are getting longer. Since mid-September, contracts expiring within a week fell "from around 45% to 20%" of volume. Contracts expiring in one to three months rose "to roughly 60% of total activity." Investors are "building medium term directional exposure rather than focusing solely on near term event risk."
France's spread now moves the euro more than before: "the transmission of the OAT bond spreads to euro dollar has accelerated." (OATs are French government bonds.) Senior currency analyst Derek Halpenny added two side effects. The Swiss franc has been "the main beneficiary" in Europe, acting as "the kind of regional safe haven currency." In emerging markets, higher volatility "triggered an unwind of some of the kind of popular carry trades," with the Mexican peso standing out. (A "carry trade" means borrowing in a low-interest currency to invest in a higher-yielding one.) The European Central Bank also has fewer options than it seems. Eurozone inflation rose to 3.8% in September, yet short-term European yields fell. MUFG thinks markets expect higher bond yields to slow growth enough that the ECB won't need to raise rates much, and that the ECB may need to slow its bond sales. Both are bad for the euro.

Who buys US debt now

Rebecca Patterson's most useful point on Squawk on the Street was about who sets the price of Treasuries:

"We had central bank buying a much bigger share, and they're sticky. Today, that has switched to hedge funds as the marginal buyer. And they're a lot more tactical, which means more volatility... We're going to have demand. But the question is, do we have enough demand to meet the increasing supply?"

Does a recession bring buyers back? She thinks yes, at least for a while: "there's just going to be an asset allocation shift into bonds." Her caveat: "the degree of diversification benefit you get from bonds this next time is a lot less than what you've gotten historically." Her list of places to hide: countries with current-account and budget surpluses ("Singapore, beautiful country to have debt. They don't have a lot of debt you can buy"), investment-grade corporate debt, "a small piece of gold," and defensive stocks that are less sensitive to interest rates. CNBC's Sarah Eisen, on the same show, added a point about the economy. The 30-year fixed mortgage rate is 7.49%, the highest since November 2023. But Goldman Sachs says over 90% of borrowers hold mortgages below market rates, which limits the damage.

Lazard: high deficits and "default through currency"

Ron Temple, chief market strategist at Lazard, gave a sober long-term view on Squawk Box Europe Express:

"My expectation is we're going to run a 6.5% to 8% of GDP deficit every year for the next decade. And at the end of 2036, we'll be at 135% debt to GDP."

Asked why the US needs deficits that big during an AI boom: "There's no reason to run it... in history, we have not seen in peacetime these kind of deficits at full employment... neither political party has an appetite to aggressively address the issue." His most dollar-relevant line came when the host pushed back on the word "default":

"I'm not thinking default in the sense of just refusing to pay back. Default can come through currency depreciation, through inflation, other ways of devaluing that debt."

He thinks "financial repression" is a growing risk over time. (That means governments keeping interest rates below inflation, so savers slowly lose money while debt shrinks in real terms.) His suggestions: hold fewer US stocks and more emerging-market stocks, give emerging-market debt "a second look" because "even the most levered EM countries have less leverage than the UK, US, Canada," and own infrastructure, which can pass inflation through to customers. He also drew a line between European borrowers: "Germany has a 65 percent debt to GDP ratio versus France at 118 percent."

Is the bond selloff mostly a seasonal effect?

(Commentator view.) Jeff Snider of Eurodollar University (Oct 7) offered the strongest argument that yields are close to a peak. He thinks September's jump was partly about the calendar. He calls it "September cubed": the usual late-summer bond selloff, a mid-September funding squeeze when "dealer balance sheets are constrained," and a jump in long-term yields that has often followed since 2021. His evidence that the pressure is easing:

"The two-year treasury yield fell from roughly 4.95% to about 4.75% in a week," then settled "around 4.8%."
"Ten-year treasuries began attracting buyers."
In inflation-linked bonds (TIPS) and inflation swaps there is "still no convincing market signature of any kind of risk for an inflationary breakout." He also pointed out that JPMorgan's Jamie Dimon has warned about higher rates before, close to past turning points, while his bank bought more Treasuries. From March 2018 to June 2019, JPMorgan's Treasury and agency holdings rose "from approximately $68 billion to more than $172 billion." In 2024 they rose "roughly $121 billion." If Snider is right, a big source of dollar support (high and rising US yields) is near its peak. Wednesday's good auction fits his view. The Fed minutes do not.

Stephanie Pomboy: "one and done," and a bond rally she'd sell

(Commentator view.) Stephanie Pomboy of MacroMavens, on Thoughtful Money with Adam Taggart (Oct 7), disagreed with the Fed minutes before they were released.

On the Fed: "I may end up eating these words, but I think it was one and done." She thinks Warsh and Bessent "watched the market reaction to that Fed tightening" (long-term yields went up after the hike) and concluded a new approach is needed. She has put her own money behind it: "I actually bought a little two year note the other day."
Why yields are rising: a mix of heavy government borrowing crowding out other borrowers, interest-cost math ("the average interest rate the treasury is paying on its debt is three and a half percent," while "the 12 month bill is four and a half percent"), and oil. She says higher oil prices "forced foreign governments to liquidate their treasury holdings to buy higher priced oil... especially with Turkey, for example."
The Fed's quiet bond-buying: the Fed is still buying "40 billion a month of T bill purchases," which she calls "the non QE QE that people forget about," even though Warsh says he wants a smaller balance sheet.
A 1987 comparison: a new Fed chair raises rates, stocks ignore it "for 10 months until October of 87." She notes lower-rated corporate bond spreads are "now over a thousand basis points" for CCC-rated debt.
Her trade: if stocks fall hard, she expects "a huge, short, but extremely powerful rally at the long end," helped by "a massive spec short position in the 10 year" being covered. "I would sell the hell out of that rally," because the deficit math would bring "$2 trillion deficits... to become $4 trillion deficits." Adam Taggart noted that bank analyst Chris Whalen, on the show the day before, also expects a short bond rally to sell into.

"Watch the MOVE index"

(Commentator view.) On The Wolf Of All Streets (Oct 7), guest Noel Atchison told Scott Melker the level of yields matters less than how fast they move. "I think we're going to go up to 6% personally. It's the rate of the change that really matters." The gauge to watch is the MOVE index, which measures expected swings in Treasury prices. When it spikes, "that generally means that the liquidity in the market is drying up." Atchison also described the Treasury's quieter steps. Buybacks of older, less-traded bonds rose "from 3 billion to 6 billion," a move Atchison called "a drop and a drop in the bucket" against roughly $40 trillion of debt. Atchison expects possible "adjustments to the Treasury issuance schedule... Less long bonds, more short bonds." On Treasury Secretary Bessent's earlier boast: "It was a month ago that Scott Bessent says very arrogantly, I am the house now. Less than a month later, he's like, I can't control the bond market." Melker listed the pressures: "30-year bonds hitting fresh 24-year highs... Dollars hitting new highs."

The bull case for Treasuries: "TNT"

On CNBC's Morning Call (Oct 7), Phil D'Angelo of Focused Wealth Management said he is telling clients to own "TNT, tech and treasuries." His reasoning: US yields have "gone up again for the right reasons," while "a lot of yields have risen for the wrong reasons" elsewhere. The 10-year "has basically risen by about 100 basis points" from its low. He blames much of the inflation on oil, with diesel "over $6," and expects the Fed to "wait till later on in the year."

The Debate: Does the Dollar Keep Climbing?

The case that it does.

The Fed still leans toward a hike. Most officials favor one more this year, and markets put the odds of a December move at 82% (Liesman).
Europe's problems are getting worse, not better. The France–Germany spread widened again after one good day, and options investors are adding to longer-dated bets against the euro (Saxo, MUFG).
France's spread now moves the euro more than it did earlier in the year (MUFG).
In a pinch, the world still buys Treasuries. "People ran to the safety of the American treasury" when France wobbled (Liesman). Wednesday's auction drew strong demand from end investors, including central banks. The case that it's near a peak.
Japanese investors may be heading home. If they leave US bonds the way they're leaving French ones, the dollar loses a big buyer (Fast Money panelist, Market Maker).
The "one and done" view: Pomboy thinks the Fed won't hike again, and October odds are only 17%.
The seasonal case: Snider sees September's yield jump as partly technical and points to the 2-year falling about 20 basis points in a week.
Over the long run, Temple's warning that "default can come through currency depreciation" is a structural case against the dollar.

The Trades in Play

These are the trades named on podcasts this week. None is a recommendation from this newsletter.

Hold euro puts for months, not days. This is what investors are doing, according to MUFG's options flow data (MUFG Global Markets Podcast).
Buy the 2-year Treasury. Stephanie Pomboy, betting the Fed is "one and done" (Thoughtful Money).
Sell any sharp rally in long-term Treasuries. Pomboy again: "I would sell the hell out of that rally."
Own "tech and treasuries." Phil D'Angelo, Focused Wealth Management (Morning Call).
Fewer US stocks, more emerging-market stocks and debt, plus infrastructure. Ron Temple, Lazard (Squawk Box Europe Express).
Surplus-country debt, investment-grade corporate debt, a small gold position. Rebecca Patterson (Squawk on the Street).
Dollar-yen at 158.50 as the level to watch. John J. Hardy, Saxo (Saxo Market Call).

Read-Throughs

Bank stocks: David Faber noted on Squawk on the Street that "very strong gains" in big bank stocks "have evaporated," and Goldman Sachs is now down for the year, even with "$40 billion bond deals" bringing in fees.
Competition for buyers of debt: SpaceX is in early talks with Apollo and several banks to finance about $40 billion of Nvidia chips through the investment-grade bond market (same episode). This is the AI-related borrowing Liesman thinks is pushing yields up.
Emerging markets: MUFG says higher volatility is unwinding carry trades, with the Mexican peso hit hardest. Temple, meanwhile, thinks emerging-market debt deserves "a second look."
The Swiss franc is Europe's main safe haven as France's troubles drag on (MUFG).
Bitcoin: it fell to about $83,000 as the dollar and yields rose, though Melker and Atchison argued it is holding up well "in context of all of that" (The Wolf Of All Streets).

What Changed

The Fed minutes made a December hike the base case. October odds are 17%; December odds are 82%.
Foreign demand for US debt held up. After weeks of worry about weak auctions, the 10-year drew above-average bidding from end investors, including central banks.
Tuesday's euro relief faded. The France–Germany spread widened back to 137 basis points on Wednesday morning and was quoted at 150 on Thursday's Market Maker. Euro-sterling hit its lowest since early 2025.
Japanese repatriation became a theme across shows. On Tuesday it was one strategist's view on the yen. Now it comes up on several podcasts, and one describes Japanese insurers already selling French bonds.

The Week Ahead

Today (Thursday): 30-year Treasury auction, another test of demand for long-term US debt.
Upcoming: IMF and World Bank annual meetings in Bangkok, with a preview speech from IMF Managing Director Kristalina Georgieva.
October 14: September CPI.
October 28: FOMC meeting (17% hike odds).
November 3: US midterm elections.
November 29: Spain's early general election.
April 18 and May 2, 2027: France's presidential election, first round and runoff.