Morgan Stanley Recommend ‘37/’57 Steepener Play

Morgan Stanley write “UK duration has found some support over the past week, after a significant sell-off during the first week of 2024. While the curve has continued to steepen - we believe that both fundamentals and technicals remain supportive for steepener trades over a medium-term horizon.”

• “First, the macro picture will likely confirm that further disinflation is ahead of us, as we expect wage growth to continue to trend lower. Second, as we approach the start of the easing cycle, curves should continue to steepen if history is any guide.”
• “The 1T 37 looks cheap, while the 1T 57 looks expensive, while we expect long-end gilts valuations to remain vulnerable amid the heavy supply schedule.”
• “Conversely, demand for duration in the belly of the curve should remain well supported as downside risks for duration decrease.”
• “The risks to the trade are: 1) A significant issuance shift to the medium bucket; 2) An acceleration of de-risking from LDI accounts; and 3) a sell-off on the back of a reacceleration in inflation which might pressure the curve flatter.”
• “We recommend entering long 1T 37 versus short 1T 57 at 20.5bp, targeting 60bp, with a stop set at 0bp.”