HALISTER1: Enter UST 2s5s Steepeners as Market Underprices June Hike: MS

Enter UST 2s5s Steepeners as Market Underprices June Hike: MS

(Bloomberg) -- Current 1-in-4 implied rate hike probability in June is too low given April FOMC minutes, recommend entering UST 2s5s steepeners, write Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra.
  • April minutes took the market by surprise, causing investors to reassess the Committee’s reaction function period between March and April meetings and putting a June rate hike on the table
  • Market should be pricing 25%-50% probability of June hike until past May non-farm payrolls
  • Cost of negative carry and roll on short 2Y is ~4bps per month, instead recommend entering 2s5s steepeners at 49bps which rolls positively at +1bp
    • Risks to trade include overseas demand in the belly of UST curve, tightening of financial conditions
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
MS US (Morgan Stanley)

People
Guneet Dhingra (Morgan Stanley)
Matthew Hornbach (Morgan Stanley)

To de-activate this alert, click here

UUID: 7947283