US Money Markets: Value in extensions given the aggressive Fed discount
At a Glance
The desk believes the current valuation of US money markets is overly aggressive, particularly given the Federal Reserve's recent actions. Per the full note from ing-think, the expectation of prolonged elevated interest rates seems exaggerated, creating value for extensions in tenors from nine months to two years. Additionally, the desk notes that the Fed's 25 basis point hike in September has further solidified rate hike pricing, with markets projecting potential cuts only in 2027 and 2028, contrary to market sentiment. While our consensus on EUR/USD stands at 1.1700, we will need to monitor upcoming economic indicators carefully as traders realign their expectations on monetary policy tightening.
Key Takeaways
- 01The desk sees current US money markets as mispriced due to overestimation of future rate hikes.
- 02Described value exists in extending tenors between nine months to two years.
- 03Consistent rate hike fears contribute to a significant carry spread, suggesting market overreaction.
- 04Potential Fed pivots towards rate cuts are projected for 2027 and 2028.
Full Analysis
What the desk is arguing
The desk argues that the aggressive pricing in US money markets reflects an overestimation of future rate hikes by the Federal Reserve, which presents an opportunity for value in longer tenors. Per the full note from ing-think, the market's current discount suggests that the funds rate will remain elevated, which may not align with the Fed's potential pivot towards rate cuts by 2027-2028.
Supporting this view, the desk highlights that the carry spread between the Fed funds rate and the 3-year rate has returned to a 100 basis point spread, indicating a strong discount for possible rate hikes. A critical point made was the current pricing of the 10-year SOFR, which suggests a funds rate averaging 5% for the next decade, a stance perceived as aggressive if viewed against historical tightening cycles.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000. Notably, firms such as morganstanley and rbc have set targets for December 2026 at 1.2150 and 1.2000, respectively.
This view is somewhat aligned with the broader market expectations. The desk's perspective suggests a potential upside towards the upper end of the forecast range as rate hike fears further consolidate in the market.
How other firms see it
Firms such as socgen and barclays share similar bullish sentiment towards EUR/USD, with targets around the mid-1.1700s. In contrast, danskebank holds a more cautious view with targets indicating a potential drift towards 1.1200.
Additionally, watch GBP/USD closely as the trajectory here will interact with the BoE’s rate outlook, alongside USD/JPY, which remains sensitive to both US monetary policy and the BoJ’s stance on interest rates.
Market Implications
Keep a close watch on EUR/USD around the 1.1700 level as sentiment around US interest rates evolves. Positioning shifts in response to economic data releases could alter consensus targets for currency pairs. Investors should look for indicators of Fed rate decisions that could impact outcomes significantly.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
Articles US Money Markets: Value in extensions given the aggressive Fed discount Published 09:00 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Fed has hiked and the market is positioned for more. Moreover, the discount is there for maintai
Related speeches
4 itemsWebinar: What if… The Fed cuts rates by next summer?
The desk is framing a scenario where the Federal Reserve may not follow through with an anticipated rate hike due this September, and could even undertake rate cuts by mid-2024. Per the full note [source], the expectation of a rate hike conflicts with potential economic indicators such as inflation trends that could shift market consensus. This contrasts with the view from firms like **jpmorgan** which anchors their predictions around a mildly bullish USD outlook through to early 2027, suggesting a levels target around 1.075 for EUR/USD.
Rates: Dealing with the rate hike narrative
The desk posits that while the market may be pricing in aggressive rate hikes, a more moderate approach is warranted based on the current rate hike narrative. Per the full note by Padhraic Garvey at ING, the desk suggests that even though hikes may not fully materialize, the anticipation and positioning toward the hikes will drive market dynamics. This perspective is especially relevant for the EUR/USD pair, where it appears the market is leaning towards a 25 basis point hike from the ECB, pushing the deposit rate toward 2.75% over the next year, despite skepticism about the delivery of all projected hikes. With the current EUR/USD trading at 1.1679 and firm targets indicating a December consensus around 1.2000, there is room for volatility in response to ECB messaging and the rate environment.