UBS Fixed Income-Global Rates Strategy _Rates Map - Limits to auction concern...

ab9 June 2025Global ResearchGlobal Rates StrategyRates Map - Limits to auction concerns and hawkish central banksUS - Stay long US 10y as employment is slowing
We stay long US 10y after US non-farm payrolls beat consensus but job growth slowed to 124k/m in the first 5 months of 2025, compared to 180k/m in 2024 (Figure 4CFTC Aset Manager positioning in the US ultra long end (WN/30y) shows record short contracts being aded in recent weks.). In recent weeks we have been arguing that underpriced risks of a growth slowdown and relatively benign US CPI prints in May/June will support 10s. Household measures of inflation expectations have risen, but have not been reflected in wage demands. On US headline inflation in May, UBS economics is slightly below consensus of 0.2% mom but the UBS nowcasting team has 0.04%.
This week's 30y US auction will be closely watched to gauge demand for ultra-longs, especially given the lack of cash flow from coupons or redemptions. Nevertheless, we would limit any concern about auction weakness given that 1positioning in the US ultra long end already shows record short contracts held by asset managers. Developments in Japan may also help ultra longs. BoJ Governor Ueda said that the BoJ will review its tapering plans on Tuesday 17 June. According to media reports, Japan's government is also considering buying back some super-long bonds. JGBs have rallied after a recent auction and several investors have told us that they expect some international buying of 30y JGBs if the Bank of Japan continues to tighten rates.
UBS economics expects the Fed to move its 2025 median dot 25 bps higher at next week's FOMC. We think that curves could flatten on any hawkish Fed messaging but this could help our SOFR Z5Z6 flattener to perform.
The appointment of Bowman to Fed Vice Chair for Supervision has renewed the focus on potential relief for US Treasuries under SLR, GSIB buffer, and other capital rules. We continue to look for a Q3 proposal, with a Jan 1, 2026 start date. The effects should be seen in repo, spreads, off-the-run liquidity, and the ability to withstand market shocks. We are long 30y US vs SOFR targeting - 55 bps. Euro area - Go long 10y Italy and receive July ECB
We went long 10y Italy at 3.50% with a target of 3.25% and a stop at 3.60% as summer is approaching with Italy having only €4 bn left of supply net of all cash flow for the remainder of the year.
We received the July ECB meeting with 3 bps priced and a target of 15 bps after last week's ECB meeting. The press conference had many hawkish elements but positioning for a cut in July offers good optionality in case of continued appreciation of the euro, disappointments in the June flash inflation print or Q2 economic data, as well as difficult US-EU trade and defence discussions. According to ECB President Lagarde, there is also risk of Q2 payback in economic growth. Our FX colleagues were also struck by the lack of pushback against recent EUR strength.