We believe that the current market pricing of Fed rate cuts is too aggressive in the 2yr part of the curve. With an uptick in the unemployment rate, the standard Taylor Rule suggests the top-end of the fed funds rate should be about 3.65%, or 185 bps lower than the current level. The number assumes of the neutral rate at 1% and NAIRU at 4.3%. Whereas the current OIS market has priced in more than 200bps cut to 3% by next year. Hence we recommend paying 1yr ahead 1yr US SOFR between 3-3.10, SL at 2.90 & TP at 3.35.
