SocGen Recommend USD SOFR 2-5y Steepener vs EUR

Societe Generale write “There seems to be little to deter the market from pricing in Fed cuts starting in March. Markets have ostensibly ignored both the sticky December CPI print and Fed speakers emphasizing the need for restrictive policy. The pricing of Fed rate cuts increased further following weaker than expected PPI data last Friday.”

• “USD steepeners vs EUR are a way to position for faster and stronger Fed rate cuts relative to the ECB. But a different stance on QT, with the Fed increasingly open to considering slowing down QT, while the ECB decided to accelerate it from mid-2024, could complicate the relative curve dynamics by exerting a relative US term premium compression compared to EUR.”
• “However, term premium valuation impacts the long-end segment of the curve more (5- 10y and 5-30y) and less the front end (2-5y). Therefore, we recommend positioning for a steeper USD 2-5y curve vs EUR, to limit the potential impact of diverging QT policies.”