At Any Rate Global Rates: Cross currency basis 4Q25 outlook
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Oct 3, 2025 Join Khagendra and Ipek as they delve into the intriguing world of cross-currency bases. They discuss how DM bases are interconnected and the current expectations for Fed cuts this year. The conversation reveals Ipek's cautious outlook, predicting fewer cuts due to inflation concerns. They also touch on the Fed's balance sheet dynamics, seasonal issuance trends, and year-end funding risks. Plus, learn about the potential impact of short USD positions on the basis. It's a lively discussion packed with insights for market enthusiasts!
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Global Basis Moves In Tandem
- Global DM cross-currency bases move largely in unison, with the first PCA factor explaining ~80% at the front end and >90% at five years.
- Ipek Ozil and Khagendra Gupta show country divergences arise from policy differences and cross-border issuance.
Market Cuts Priced Too Aggressively For 2026
- Markets price ~45bp of Fed cuts by year-end which matches J.P. Morgan's near-term view of two cuts this year.
- Ipek warns markets price too much easing for next year versus the firm's one-cut view.
Fed QT Continues But Reserves Remain Ample
- The Fed's balance sheet is shrinking at about $20bn per month while reserves remain above $3tn and RRP usage is minimal.
- J.P. Morgan expects QT to continue at least into 1Q26, barring funding stresses.