/STIRS: UBS: Bond Market Divergence To Continue

UBS write “earlier arguments for a wider 10y US Treasury vs Bund spread still hold. We see US 10y yields ending 2024 at 3.60% compared to 1.80% for Bunds. UBS expects the first ECB cut in April and the first Fed cut in May, but we then expect the Fed to cut more sharply.”

• “We do need weaker data to validate current front-end pricing in the US and still like US steepeners. In Europe, the UK is our preferred market, but we also like 2y Bunds. We had been neutral European duration into Jan ECB, inflation and strong supply. Nevertheless, we think 10y Bund yields ultimately settle lower given the UBS baseline of sluggish growth, even if forward-looking indicators improved somewhat.”
• “The ECB’s gradual approach in QT and the flexibility in the new EU budget should support country spreads in Q1. We had recommended to enter into steepeners around the release of euro area inflation but US data stole the show. We still like Sonia Dec 24 v Dec 25 flatteners and Saron Mar vs Dec 24 flatteners.”
• “Receiving Dec 25 ECB remains a high-conviction but we would tactically pay Dec 24 as some ECB GC members are likely to push more actively against a deeper cutting cycle, even if they agree with a couple of calibration cuts.”
• “More than the timing of the first cut, focus in client meetings has shifted to the likely path of cuts. The ECB is focused on developments in wages and profit margins but will only get data on compensation per employee and corporate profits for Q4 right after the March ECB meeting.”