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GLOBALLY STEEPENING IS THE MACRO TREND

ADMIN || 25th September 2025

With the onset of 2nd cycle of rate cuts in US, we believe we are in for another round of significant steepening globally across DMs.

Starting from US, we believe short end US rates have a lot of scope to go lower. Currently the market is pricing in only 44 bps of cuts in REMCY25 where as terminal is 3%.

We believe employment nos will gradually go to -ve territory from Oct NFP leading to markets pricing in terminal rate of 2.75 or even below. With Fed Chair term ending in May, Trump will announce his replacement by the end of this year leading to increased expectations of rate cuts. We believe that Waller’s likelihood of replacing Powell as chair has declined post last week FOMC where he voted for 25 bps cut. This raises the possibility of an even more dovish replacement and therefore the likelihood of increasingly aggressive easing in the post-Powell Fed.

This will lead to higher inflation expectations in the long end which will lead to severe steepening by end Dec’25. We expect to see 50 levels on the 2-10 US SOFR by end Dec’25 from the current 24 levels.

Even on the Eurozone side, large fiscal expansion from Germany as well as Eurozone bloc as a whole will lead to long end yields underperforming short end yields leading to further steepening from current levels. The same trend we shall see in JGBs (due to fiscal expansion & elevated inflation expectations impacting long end JGBs) and UK Gilts (rate cuts getting repriced on short end UK gilts & fiscal worries impacting long end UK gilts). Specifically, on ESTR, we can expect to see 100 levels from the current 60 odd levels by end CY25.

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