UBS Fixed Income-Global Rates Strategy _Rates options trades we like_ Gale-117142375

ab8 August 2025Global ResearchGlobal Rates StrategyRates options trades we likeWe review our trade ideas in options-themed notes from 2025, grouping them into 1. Bullish USD rates, 2. Counter-trend, 3. Euro steepeeners and front loaded long-end volatility, 4. Short Euro volatility, 5. Short USD vega and 6. UK. Our record can be viewed in Figure 7Options trade idea record.We add two new trades:(1) 'Counter-trend' USD: the 3m5y 3.4%-3.535%-3.67% payer ladder is zero cost, makes money between 3.4% and 3.8% in 5y. Losses increase above 3.8% which was resistance in April and May. See 2a below.(2) Bullish USD 2y vs EUR 5y cross-market steepener in receiver spreads. See 1c in below.We continue to emphasise USD bullish steepeners (in 2s5s) as a core trade, USD bearish flatteners (in 5s10s) as a counter-trend trade and variations on EUR curve steepening. For readers with access to Neo T-Pricer, links to the tool are provided.1. Bullish USD ratesOur core recommendations have been bullish steepeners and receiver spreads vs EUR rates. 1a. US bullish steepeners We see bullish steepening as an attractive risk-reward way to be long. Our conviction is that the broad based weakening in US data will dominate for the Fed, unlocking lower rates sooner.
Fed pricing should accelerate. Pricing now puts more weight on two 25bp cuts over the three remaining meetings this year than three or more. If the Q2 slowdown is confirmed in upcoming data as more than just a tariff-undertainty-driven soft patch from which we are already emerging, we believe 50bp moves will be considered. If so, shifting the futures strip lower could easily pull the 2y rate out of November down by 25-30bp.
Risks should push the terminal lower. The terminal Fed rate at 2.95% is now below our assumed terminal rate, but close to most views of the 'neutral' rate. It should be easy for markets price in a meaningful probability that more accommodative policy will be needed. 1y1y, now 3.11% could fall significantly further.
But there is little reason to expect persistent low-inflation cycle. 2y3y at 3.35% would fall further in a rally. But we would expect resistance at around 3% as markets price a normal cyclical recovery.
Key risk: more aggressive tariffs raise inflation-growth tension. In principle, Fed cuts being pushed back is a bearish risk that the bullish flattener sidesteps. But the sold 5y receiver could come under pressure if markets think that a future recession is the only way back to price stability, inverting the reds and greens. 2y3y could also come under downward pressure if the term premium in the strip were to compress significantly: it is quite steep from 2028 to 2030.This report has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 8. Interest RatesAmericasGiles GaleStrategistgiles.gale@ubs.com+44-20-7901 6066Reinout De BockStrategistreinout.de-bock@ubs.c