The divergence between major US stock indices and US Treasury yields is disconcerting. Typically, we would reasonably expect yields to rise in tandem with stocks when sentiment is fairly stable. However, that has not been the case. In fact, stocks have largely recovered from the declines seen in the carry unwind episode (yen and tech stocks) in early August. By contrast, yields across the 2Y to 10Y tenors did not manage to climb back above 4% despite the massive rebound in equities. We are not convinced that this phenomenon can be sustained - either yields are correct in pricing a pessimistic outcome for the US economy thereby necessitating aggressive Fed easing or stocks are correct in taking a more optimistic view on the economy and Fed cuts are likely to be more calibrated. It could well be that both asset classes hold too extreme views and should be faded accordingly. From the rates perspective, we remain unconvinced that the Fed would need to cut by more than 200bps (market pricing) in this cycle. US data appears more mixed than weak and it require a string of data misses for the cuts to be delivered. However, we also acknowledge that one bad NFP print would probably nudge yields another leg lower. Accordingly, we think steepening offers better risk-reward than outright pay positions. 
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