Morgan Stanley: Enter Short 2y SOFR Swap Spreads

Late on Friday Morgan Stanley wrote “to capture the potential of tighter funding conditions in the coming weeks, we enter short 2y SOFR swap spreads at -9.5bp.”

• “Primary dealer holdings of front-end UST (0-2y) have continued to trend higher over the past weeks.”
• “Ongoing large net coupon settlements and higher intermediation costs in UST cash and repo markets should also contribute to tighter 2y SOFR swap spreads.”
• “We also see this trade benefitting even if funding conditions remain unchanged given the overly restrictive Fed path expected by the market.”
• “As growth momentum continues to cool into year-end, we continue to see the potential for the market to price in sooner/more cuts as two-sided risks become more apparent.”