ab23 February 2024Global Research and Evidence LabGlobal Rates StrategyRates Map: Plotting the post-pandemic easing cycle Policymakers are taking a cautious approach to the upcoming easing cycle compared to market pricing. Some point to a cutting cycle with small steps and plenty of optionality. Nevertheless, there has been a real erosion of pandemic buffers and policy rates are restrictive. Net financial assets of households were at record levels at the start of this tightening cycle but are now close to 2019 levels as a percentage of GDP. We expect European rates to remain under pressure as investors await the flash February inflation report (1 Mar) and the ECB meeting (7 Mar), but also more clarity on US activity and inflation. Even the 7 March meeting might not bring clarity on the "April vs. June" issue. We anticipate buying interest to pick up if 10y bunds move above 2.5% levels as inflation ex tobacco is still set to fall below 2% in the summer. Curves flattened this week and steepeners could struggle until there is more clarity on the easing cycle. We recommended to pay the Dec '24 meeting in early Feb but pricing is close to fair again with 100 bps of cuts priced for 2024. Receiving Dec 25 ECB (currently: 2.47%) has been one of our high conviction views so we would look for entry points. We expect BTP spreads to trade at levels close to our E2024 target of 140 bps after next week's BTP Valore. Spreads still appear cheap compared to the iTraxx Europe Index. Our credit colleagues have a carry view for H1, with a slight tightening bias in Europe vs. US (ex-CCCs). We still like Sonia Dec 24 vs Dec 25 flatteners and Saron Mar vs Dec 24 flatteners. Fading the steepening of the SONIA March 24 vs December 24 curve vs EURIBOR also looks attractive. Global Inflation Monday: Data sets a bullish tone for breakevens in the US and globally. 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 9. Interest RatesEurope including UKReinout De BockStrategist reinout.de-bock@ubs.com +44-20-7567 0152Emmanouil KarimalisStrategist emmanouil.karimalis@ubs.com +44-20-7567 8000Michael ClohertyStrategist mike.cloherty@ubs.com +1-203-719 4281Giles GaleStrategist giles.gale@ubs.com +44-20-7901 6066 Global Rates Strategy 23 February 2024ab 2Figure 1: Summary of ViewsSource: UBSA cautious approach to the upcoming easing cyclePolicymakers are taking a cautious approach to the upcoming cycle compared to both market pricing and previous easing cycles. ECB GC member Schnabel pointed to uncertainty about r* and a cutting cycle with small steps and potentially even a pause. Fed vice chair Jefferson emphasized that the July 1995 easing cycle was a "perfect soft landing", where the FOMC started to eas...
