UBS Fixed Income-Global Rates Strategy _Rates Map - Trading foggy data and ce...-119018641

ab24 November 2025Global ResearchGlobal Rates StrategyRates Map - Trading foggy data and central banksInvestors will likely have to navigate a Fed that will operate with "the least groupthink you've seen from the FOMC in a long time" (to quote Governor Waller). There are diverging views not just on the implications of delayed jobs data but also on the response to US repo pressures. In the euro area, ECB President Lagarde said at the October press conference that the ECB is in "a good place" but issued a stark warning about growth vulnerabilities last week. Divergence in central bank views and delayed data make high-conviction trades harder. For now, we are still receiving December FOMC and ESTR 2y1y, both opened on 11 November. We otherwise stay long US 10y, 30y SOFR spreads, EU 10y and Italy 30y. In curves we are holding a SOFR 2s5s steepener and EUR 10s30s steepener.Pricing US labour market weakness firstAI investment may be boosting growth rates but labour market data are in line with ongoing weakness so we stay long a Dec FOMC receiver (opened on 11 November), even if only a slim majority on the FOMC looks likely to support the cut. We stay long US 10y and 30y US vs SOFR. A wider US deficit is a risk to our long UST bias, but we think the appetite for another sizeable bill out of the Republican Congress is low.Waning convictions on US inflation US inflation swaps fell sharply, with a drop of 43 bps in US 1y inflation swaps to 2.59% in the past month. This has been a theme in recent meetings. Some clients are expecting a more contained pass-through from tariffs but also expect weakness in energy prices to persist with concerns that positioning in inflation markets got overly stretched. This is the case even with clients who expect that the Fed will struggle to bring inflation back to target in the years ahead. We are now negative US CPI. UBS projections for inflation are benign relative to fixings until March next year (see figures below). The new normal on Fed reserves We expect the FOMC to respond to repo pressures, even if there is some disagreement on the balance sheet outlook. We would position for a smaller gap between 1-m SOFR and Fed Funds rates in January, but stay away from December trades (so paying Jan '26 SOFR/Fed Funds, targeting a move to - 7 bps from -10.5 bps currently). Dallas Fed President Logan said that the Fed will have to resume balance sheet growth to get money market rates closer or slightly below the interest rate on reserve balances. But President Logan does not want the FOMC to take a mechanical approach. This is also a topic on which we expect more discussion within the FOMC, with a decision that may not arrive at the December meeting. Governor Waller, for example, has pointed to 9% GDP as the threshold below which reserves would not be ample. Governor Miran, on the other hand, said that the optimal level of reserves may drop below current levels, at least relative to GDP or the size of the banking system