Macro Matters: Rabobank’s Lawrence on Rates and Global…

PodcastFICC FocusChristian LawrenceOct 1

Lawrence argues that national-security priorities are reshaping capital allocation and that governments will keep loosening fiscal policy to fund industrialization, AI, and military programs. He expects fewer rate increases than markets are pricing, while attributing higher U.S. yields mainly to real yields and strong growth. In markets, he sees narrowing equity breadth, a continued short-term carry-trade unwind, and further dollar upside; he favors quality equities and relative-value rates positions.

Interest Rates Geopolitical Risk Fiscal Policy Market Breadth Currencies Investment Strategy

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Key Takeaways

Lawrence argues that national-security priorities are ending hyperglobalization and driving more government intervention in capital allocation; he expects fiscal loosening to continue internationally, including spending on industrialization, AI, and military programs. He says Trump could also intensify executive-branch policy shifts after the midterms, even though major policies are already being driven through that branch.

Lawrence expects fewer rate increases than markets are pricing, with one Fed hike and another ECB hike in his outlook, and says a sustained hiking cycle is hard to justify when inflation is primarily an energy story. He notes that higher oil—especially diesel—can still lift CPI and PCE expectations and rate expectations, though U.S. diesel pass-through into broad inflation has been weaker than in some past episodes.

Lawrence attributes the rise in long-term U.S. yields mainly to strong growth and real yields, rather than higher breakeven inflation expectations; he says AI-related crowding out may also be part of the story. He describes the move as painful but orderly, accelerating after 10-year yields crossed 4.7% and then 5%, with swap spreads contained even as leveraged fast-money accounts took some losses.

GEO-POLITICS

Post-Midterm Policy — Lawrence says the midterm elections could affect the fiscal situation, but argues that major policies are already being driven through the executive branch. He says Trump could accelerate some executive-branch policy shifts after the midterms.

“I think for the midterm elections, look, of course, that can have an impact on the fiscal situation…”—

ECONOMY

Rate Expectations — Lawrence expects fewer rate increases than markets are pricing. He notes that markets have tended to overestimate both cuts and hikes before scaling back expectations. He has one Fed increase and another ECB increase penciled in, but says a sustained hiking cycle is difficult to justify when inflation is primarily an energy story. He also says U.S. diesel-price pass-through into broad inflation has been weaker than in some previous episodes.

“I do have a rate increase penciled in for the Fed this year. We do expect another rate increase from the ECB…”—

MARKETS

Real-Yield Drivers — Lawrence says rising U.S. 10-year yields have been driven mainly by real yields, rather than higher breakeven inflation expectations. Higher oil prices, especially diesel, can still contribute indirectly by lifting CPI and PCE expectations, increasing rate expectations and the expected terminal rate.

“But, of course, when you look at the rise in ten year yields, it hasn't really been driven by increased inflation expectations…”—

Long-End Yields — Lawrence identifies strong growth and real yields as the main drivers of the long end. He says the U.S. term premium had generally declined after Jackson Hole, with only a partial retracement, and describes AI-related crowding out as a possible part of the story.

“There's a lot of focus, of course, on the term premium, although, as I always like to point out, well, some media outlets, and Bloomberg certainly isn't one of them…”—

Treasury Repricing — Lawrence describes the rise in 10-year yields as painful but orderly. The move accelerated after yields crossed 4.7% and then 5%. Several weeks earlier, he had not expected yields to exceed 5.3%. Swap spreads remained in check, while leveraged fast-money accounts felt some of the pain. Bond volatility was high relative to the last 18 months, but not particularly high relative to 2022–2024.

“I don't think it's a coincidence. We saw the acceleration really start as we breached 4.7 and then really accelerate as we broke through that that five percent handle…”—

FORECASTS

Equity Outlook — Lawrence expects hyperscalers to remain well supported but predicts continued downside in semiconductors. He favors large-cap quality companies with free cash flow and stronger operational efficiency. He expects a partial S&P 500 retracement in the coming weeks but still targets the index above its current level by year-end. He says stock selection matters as hyperscalers dominate index performance.

“Now where do we go from here from that perspective? Well, I to think that we see hyperscalers remain pretty well supported…”—

Dollar Outlook — Lawrence expects further dollar upside, though not at the pace of the recent surge. He links reduced downward pressure on the dollar to declining foreign-buyer hedge ratios after the correlation between currencies and equities flipped.

“Now what we've seen is since the correlation between currencies and equities has flipped again, we're now seeing that those foreign hedge ratios have declined quite substantially…”—

Real Yields And Growth

Lawrence attributes higher long-term yields mainly to real yields and strong growth, with energy prices affecting rate expectations and fiscal policy and term premiums also contributing.

Treasury Yield Pain Trade

Lawrence sees the rapid Treasury selloff as a painful, but not disorderly, positioning-driven move and says higher yields could create value, though timing a reversal is difficult.

Equity Breadth And Quality

Lawrence says market breadth has narrowed and higher rates are pressuring many companies, while hyperscalers remain supported and quality, cash-generative stocks should fare better.

Dollar Strength And Carry

Lawrence expects further dollar upside as growth and rate prospects support it, while noting that recent volatility is unwinding carry trades and could later ease.

Central Bank Rate Outlook

Lawrence expects fewer rate increases than markets are pricing, arguing that energy-driven inflation may not produce enough persistent pressure to justify a sustained hiking cycle.

Fiscal Spending And Security

Lawrence expects governments broadly to loosen fiscal policy as national security and economic statecraft push spending toward industrialization, AI, energy, and military programs.

Quality Equities And Rates Value

Lawrence recommends patience in the near term, favors quality large-cap equities and a return of FX carry, and prefers relative-value rates positions over outright bets.