UBS Fixed Income-Global Inflation Strategy _The Global Inflation Friday_ Gale

ab13 June 2025Global ResearchGlobal Inflation StrategyThe Global Inflation FridayLong 10y TIPS, short 10y RPI Weaker data but strong risk markets. We think US breakevens have overshot to the low side. You hardly need a model this week to see that TIPS breakevens have been unusually weak. Stocks have been resilient (until today) and oil is up sharply, yet breakevens are down (Figure 8The inflation sentiment scorecard pulout. 5y5y has ben tracking risk, but not the raly in comodities..) The nominal beta and weaker economic data are the reasons, in our view. The beta is often something to fade because this is not a long-term relationship. Some might have been fooled by the too-aggressive seasonal adjustment in the CPI data, but there was disinflation there too - especially OER and transport services, which might be part of a weaker growth story. Labour market data has also been tracking weaker. But for 5y5y to be lower as a result of all this makes no real sense. The conclusion this week then is an easy one: we stay long 10y breakevens (which is treading water since we recommended it in May because we have had carry on our side). We still view the TIPS market as essentially tactical. Valuations are not at levels to engage 'reaction-function' led beta trades, and correlations are not likely to help bring strategic money into the product. With that in mind, though, our tactical model says buy. Seasonally adjusted 10y breakevens sit just above 220bp, so valuation is also a green light. Carry should remain positive at least until December. Fixings are still well below where we think inflation will climb as tariff-led inflation picks up from July. One headwind for breakevens could still be lower rates, but after this week and given valuations, that is not our prime concern. Risk-reward looks good for real rates. A starting point of low breakevens, weaker data, trade uncertainty coming to a head in July, middle-eastern geopolitics tensing again, and stocks entering all this on a high, all skew the risks bullishly. Importantly, all this increasingly applies across the curve. Weaker data and a little confidence that the Fed might be helpful for rates investors seems to go a long long way. Curve dynamics have normalised (i.e. reverted to bear-flattening/bull-steepening) and supply confirmed a basic level of comfort this week. EURi front end is fair, long end lacks support. We turn neutral. Last week we went neutral on front end breakevens - not good timing. In contrast to US breakevens, European breaks have done well this month and the rally in oil as we write has been a shot in the arm. We won't chase it. As breakevens head back toward 2%, the case for considering beta strategies is also slipping away. Caught between valuations which still look on the cheap side and a showdown on trade next month (more warning shots to unsettle markets might also be expected as that draws nearer) we have no conviction to highlight this week. RPI this week and supply and