Trade Synopsis: Pay 10-year US SOFR at 3.19

Trade Recommendation: Pay 10-year US SOFR at 3.19, SL at 2.99 & TP at 3.40.

Introduction: We believe that the current market pricing of long-term R* by market is far below where R* might be shown by Fed DOTS in it’s Sep meeting. Markets are pricing in 2.75 levels as interest rates by mid CY26 which is way below what we believe the actual R* is. Our R* belief is any where between 3.25-3.5.  If our assumptions on R* is correct, then with current fiscal deficit of 7% of US GDP, term premium has to be a minimum 50-60 bps from R* on the 10-year UST. This brings us to a fair value of 10yr UST around 3.85 which compares to current level of 3.65.

Summary: Pay the 10 Yr US SOFR around CMP of 3.19, with Stop Loss at 2.99 & Take Profit at 3.40.

Risks to the view: A major global risk off event or Fed turning more dovish than what is priced in market currently in it’s 18th Sep meeting. 

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