UBS Fixed Income-Global Rates Strategy _Rates Map - Trading a 15 tariff regi...-116775594

ab24 July 2025Global ResearchGlobal Rates StrategyRates Map - Trading a 15% tariff regimeUS - Close SOFR Z5-Z6 flattener and receive June '26
We close our SOFR Z5-Z6 after it hits its target of 75 bps cuts priced for 2026 and go long SOFR M6 (June 2026). We opened the Z5-Z6 flattener on 27 May thinking it could allow investors to navigate the risk of a slow-moving FOMC and elevated CPI prints in 2025. The trade agreement with Japan on 15% tariffs and more clarity on the new trade regime with the EU potentially also at a 15% headline tariff, should alleviate concerns about upside risks to tariffs. The new trade also captures the risk of more cuts being priced in 2025 in case of a weak NFP jobs report on 1 August. Chair Powell's appointment as chair will also end in May 2026 so the trade could perform in case of a new appointment who would cut rates more quickly and deeply. Around 89 bps of Fed cuts are priced between now and June next year. We target 120 bps of cuts to be priced, with a stop at 75 bps of cuts. The yield target is 3.10% with a stop at 3.60% (from 3.44% currently). The trade also fits well with expectations of the UBS economics team for 100 bps of cuts already in 2025.
Other high-conviction trades are a 5s30s US steepener and long 5y US. We have been more cautious on US duration after the June NFP report so the recent rally surprised us. We do think that US duration will trade better again in August and Fall. There is a risk that oil prices go below the UBSe $62/bbl base case for 4Q25 if OPEC+ adds another 548kb/d in September at its 3 August meeting.
Clients have been asking about large increases in buybacks and cuts in quarterly coupon issuance ahead of the Treasury's quarterly refunding announcement on 30 July. We expect an increase in quarterly buybacks to $40 bn, from a target of $30 bn, but we see limits to how much the Treasury wants to depend on a large buyback program. Nevertheless, quarterly buybacks of less liquid long-dated Treasuries would provide dealers with some capital relief and support our long US 30y vs SOFR, and more general widening in US long spreads (so for US Treasuries to outperform swaps).
More on US refunding and buybacks here and more on the GENIUS act and the net demand for UST bills here. Euro area - Tariff deal of 15% keeps door open to more easing
We stay long Dec'25 ECB as the pricing of further Fed rate cuts could help the euro appreciate to the UBS target of 1.23 by year. This is not just about relative central bank pricing though. A EU-US trade deal with a tariff of 15% on EU imports, even with waivers on some products, could pose downside risks to euro area growth and inflation. Further downside risk to inflation would be challenging for the ECB as its headline inflation forecast for 2026 is already 40 bps below target and climate-change related fiscal measures is what brings inflation back to 2% in 2027.
Clients often ask if we are not underestimating the impact of fiscal st