U.S. Rates Heading Deeper Into The Zone Of Interest

2025-01-10 01:40:00 ET

Summary

• Don't get us wrong – we're not going all bullish on Treasuries.
• But for swap players looking for opportunity, it would be remiss of us not to note that long tenor SOFR rates are now trading at above what we would call neutral valuations.
• Not only are they set to get tastier still, but we are on the cusp of hitting impact-positive carry circumstances, which make swaps to floating that bit more palatable to set.

By Padhraic Garvey, CFA

So far in the current rate cut cycle, the Federal Reserve has cut the funds rate by 100bp. Over the same period, the 10yr rate has risen by c.100bp. That 200bp swing is remarkable. The best explanation for this is reflected in changes in the market rate cut discount. When the Fed first cut in September 2024, the end-2025 funds rate was discounted at 2.8%. Now it's 3.9%, up 110bp; broadly equivalent to the move in the 10yr rate....

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