Cross-currency basis is significantly influenced by predictable seasonal trends in bond issuance. "Yankee" issuance (foreign entities issuing in USD) is historically strong in January, creating narrowing pressure, but is expected to decline. Conversely, "Reverse Yankee" issuance (US entities issuing abroad) starts slowly and picks up in February, supporting a widening of the basis.
Despite strong economic data suggesting the Fed should hold rates, markets are pricing 40-50 basis points of cuts. This discrepancy is driven by political uncertainty around the appointment of a new Fed Chair, as the administration's focus on lower rates makes it difficult for markets to price out easing until the new leadership is confirmed.
The Estet-Sofar basis is in a "tug of war." Diverging rate policies, where the market prices Fed cuts against a European Central Bank on hold, support a wider basis. However, the Fed's accommodating balance sheet policy (T-bill purchases) relative to the ECB's supports a narrower basis. This results in an expectation for the basis to remain in a tight range, albeit with a slight widening bias.