UBS Fixed Income-Global Rates Strategy _Rates Map - 10y US versus Germany to ...-117054142

ab5 August 2025Global ResearchGlobal Rates StrategyRates Map - 10y US versus Germany to narrowUS - More than disappointing job growth
We stay long SOFR June ’26 expecting the rate on the contract to fall to 3.10% (from 3.25% today). This rate has moved ~25 bps since we initiated the trade on 24 July after closing our Z5-Z6 flattener (Figure 2US SOFR rates since we went long the June 2026 contract on 24 July (%). ). We see downside risk to our target even after last week's bond rally (Figure 3There has ben a persistent link betwen job reports and yields in recent years, with beter-than-expected US jobs data pushing yields higher. ). This trade is about more than the July jobs report as other sectors also indicate an economy at stall speed. Housing data have been weakening as mortgage spreads over Treasuries remain ~30 bps above levels of the 2010s. UBS estimates that an increase in weighted average tariff from~16% to~19% could lower growth ~0.1 to 0.2 pp over the next four quarters. Tariff revenues are currently running at a $320 bn annualized pace. We should also get more clarity on the potential appointment of a prospective Fed chair with a more dovish bias sooner rather than later.
Other high-conviction trades remain the 5s30s US steepener and long 5y US. We has been writing that US duration would trade better again in August, but the rally happened a bit earlier than we expected. There is a risk that oil prices go below the UBSe $62/bbl base case for 4Q25 after OPEC+ added another 547kb/d in September at its 3 August meeting.
CPI data for July will be released on 12 August. UBS expects an increase of 0.24% mom. According to Pricinglab, the cumulative increase in imported goods prices since early March tracks around 4% at major retailers compared to 2% for domestic goods.
US refunding was very much in line with our expectations, with unchanged coupon auction sizes and an increase in long-end buybacks of $8bn/quarter. Some investors had expected bigger buybacks; we think that the Treasury wants to limit dependence on large programs. Nevertheless, buybacks of less liquid long-dated Treasuries should provide dealers with some capital relief and support our long 30y Treasury vs SOFR position. Euro area - Smaller growth differential and high bar for September cut
We go long US 10y versus Germany at a spread of157 bps (with a target of 135 bps) as a stalling US economy should lead to further Treasury outperformance and a smaller growth differential between the US and the euro area. What could also help the trade, is that the bar for a September cut by the ECB seems high. Furthermore, ECB press conferences have generally led to higher bund yields, in contrast to lower US 10y yields at FOMC meeting windows. This trade should also work in 5y5y US vs euro swaps (Figure 7We go long 10y US vs Germany as US treasuries could outperform on further US growth weaknes and Germany is set to increase deficits. ).
With more clarity on the tariff re