HALISTER1: Fade Any UST Flattening Should Fed Keep June Hike on Table: MS

Fade Any UST Flattening Should Fed Keep June Hike on Table: MS

(Bloomberg) -- Fed will aim to keep possibility of a June rate hike on the table, resulting in curve flattening; recommend fading any flattening by adding to UST 5s30s curve steepeners, Morgan Stanley strategists including Matthew Hornbach write in client note.
  • Fed to be less pessimistic about chance of June rate hike than the 20% probability currently implied by the market
  • Continue to recommend 5s30s steepeners between 1.30%-1.40%
  • Real term premiums can rise going into the FOMC meeting; recommend taking off outright longs in 30Y TIPS
    • Instead recommend long 04/2020 breakevens; TIPS index extension will be quite large at 0.25yrs this month; large index extensions typically coincide with positive breakeven returns
  • Recent widening in swap spreads mostly driven by widening in funding rates between spot 3m Libor and 3m GCF repo
    • Widening concentrated in 2Y point; 5Y spreads have lagged, partly due to corporate issuance in the belly of the curve
    • 5Y spreads should have widened more on the factor driving 2Y spreads; recommend entering 5Y spread wideners at -4bps
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
MS US (Morgan Stanley)

People
Matthew Hornbach (Morgan Stanley)

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