Morgan Stanley Recommend Long RXZ3 129.50/131.00 Call Spread

Late Friday saw Morgan Stanley write “in the very near-term, we continue to think that the 2.80/3.00% Bund trading range could prevail.”

• “A period of a couple of weeks of consolidation with falling historical volatility on core EGBs could reassure investors and lead to investors fading the post FOMC selloff on core EGBs.”
• “We maintain our two structural long duration trades expecting the repricing of the currently very high term premium on 10y Bunds.”
• “Following the very firm price action post the US non-farm payrolls data, we decided to enter a December 129.50/131.00 call spread on the Bund future.”
• “The late November expiry fits with the timing of the seasonal year-end rally on EGBs. A return to 131 would still imply a 10y Bund trading with a 40bp discount versus our long-term model fair value.”
• “The risk to the trade would be a further selloff in U.S. Treasuries, on the back of stronger-than-expected data, which would likely fuel a selloff in Bunds.”