Strategists at Citi anticipate that softening oil prices and a cooling US labor market will apply downward pressure on the US dollar while simultaneously alleviating upward pressure on long-term yields.

"The relief valve will shift to the FX market," analysts including Adam Pickett wrote in a note. They attribute the rise in yields to surging energy costs and robust economic growth momentum, describing the move as "entirely a rise in real yields, which has largely tracked movements in energy prices."

The strategists found only "weak evidence" that fiscal concerns, inflation expectations, or an outsized supply of corporate debt issuance were responsible for the increase in Treasury yields.

They continue to hold short positions on the dollar against the euro, gold, and high-yielding emerging market currencies, while maintaining a long risk position in US equities. A retreat in energy prices and a weaker labor market should also ease pressure on Treasury Secretary Scott Bessent, who has expanded buyback operations to curb rising borrowing costs.

"For Bessent, the good news is that, based on Citi's forecasts, the oil market and US labor market are set to soften," they said. The strategists added that more significant action on debt issuance or fiscal policy is unlikely until after the quarterly refunding announcement on November 2 and the midterm elections on November 3.