Morgan Stanley Recommend 10s/30s TONA OIS Steepener

Morgan Stanley write “our economists expect February’s Tokyo CPI release to mark somewhat of a turning point for domestic inflation.”

• “Such evidence of a deceleration in inflation could lead some market participants to dial back their positioning for further YCC adjustments and/or commencement of a full-fledged rate hike cycle.”
• “The market-implied probability of a BoJ rate hike cycle is indeed now back to roughly where it was prior to the December YCC adjustment, but we nevertheless see scope for a further correction given that many are as yet positioning for NIRP to be terminated in April.”
• “We also see at least some downside for belly-zone yields in the short term given that: (1) a short squeeze appears likely as the lead JGB futures contract rolls over from March to June; and (2) short covering might also be fuelled by the imminent hike in the Securities Lending Facility minimum fee rate for three on-the-run 10-year JGB issues.”
• “Too much is also priced in the near-term re: the BoJ's YCC adjustment in the OIS space as well.”
• As such, they recommended entering a JPY TONA OIS 10s30s steepener at 41.5bp. “The risk to this trade is additional expectation to position for YCC adjustment in the near term.”