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Morgan Stanley Recommend 2s20s Steepener, Moves further In Profit

US TSYS
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Late on Friday Morgan Stanley recommended a 2s20s steepener.

  • In light of last week’s Trump-Biden debate they believe that “the market now has to contend with rising probabilities of changes in immigration and tariff policies in an economy where growth has already been cooling, making the market more likely to price more Fed rate cuts.”
  • “On the other hand, higher prospects of a Republican sweep, amid growing focus on deficits, could put upward pressure on long-end term premiums.”
  • They chose “the 20y point over the 30y point given the recent richness of the 20y point over the 10s20s30s butterfly.”
  • The recommendation came with the spread trading at -11bp.
  • The trade has already moved in their favour, printing at -8bp as Friday’s outright sell off & curve steepening extends further.
  • The May 9 high has capped the steepening move.

Fig. 1: U.S. 2-/20-Year Tsy Spread (bp)

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Late on Friday Morgan Stanley recommended a 2s20s steepener.

  • In light of last week’s Trump-Biden debate they believe that “the market now has to contend with rising probabilities of changes in immigration and tariff policies in an economy where growth has already been cooling, making the market more likely to price more Fed rate cuts.”
  • “On the other hand, higher prospects of a Republican sweep, amid growing focus on deficits, could put upward pressure on long-end term premiums.”
  • They chose “the 20y point over the 30y point given the recent richness of the 20y point over the 10s20s30s butterfly.”
  • The recommendation came with the spread trading at -11bp.
  • The trade has already moved in their favour, printing at -8bp as Friday’s outright sell off & curve steepening extends further.
  • The May 9 high has capped the steepening move.

Fig. 1: U.S. 2-/20-Year Tsy Spread (bp)

Keep reading...Show less