SEI has entered a position designed to benefit from the widening of relative central bank policy rate expectations over the coming year.

Federal Reserve vs. European Central Bank

In the U.S., SEI believes the rates market has priced in overly optimistic expectations for interest rate cuts, given resilient economic growth and persistent inflation. In our view, the Federal Reserve’s dependency on economic growth and inflation data tilts risk in favor of higher short-term interest rates in the U.S. In contrast, the European rates market is priced for a more muted easing cycle. We view this as misaligned with the sharp deterioration in European economic activity. Accordingly, we believe the risk is skewed towards lower short-term interest rates for the European yield curve. As can be seen in Exhibit 1, implied policy interest rates indicate expectations are for about two 0.25% rate cuts in Europe. Meanwhile, the implied policy interest rates for the U.S. indicate the potential for about four 0.25% rate cuts.

In an effort to capitalize on these perceived dislocations we have structured a relative value trade that will benefit from the widening of the short-term rate differential in the U.S. versus Europe. As a relative value trade, the position may benefit from either reduced easing in the U.S. (fewer cuts than the market currently expects) or increased easing in Europe (more cuts than the market currently expects).

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk

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