MS: Markets Underestimating Probability Of 50bp May Hike? Enter FFJ3/K3 Steepeners

Morgan Stanley recommend “FFJ3/K3 steepeners to position for a higher probability of a 50bp hike at the May FOMC meeting.”

• “There are three reasons the FFJ3/K3 steepener trade can work: (1) March 50bp probability could spill into May: Given the weather distortion weighing on the market and the Fed, we think markets will converge to 25bp in March, while spilling some 50bp hike probability into May, (2) given stickiness of inflation numbers and nascent signs of a rebound in certain sectors, the re-acceleration narrative could grow in markets, and (3) most importantly, a 50bp hike tightens FCI more effectively than just adding 25bp hikes toward a higher terminal rate.”
• They recommended entering the trade at +25bp.