Halister News

(Bloomberg) -- Recent declines have sent 10Y sovereign yields to “levels that would be hard to justify outside of any flight-to-quality episode,” and while investors should not initiate short positions, focus should be on relative value, Morgan Stanley strategist Matthew Hornbach says in note.

• Long 10Y call was initiated on Dec. 11; UST 10Y yield declined 75bp from Dec. 15, day before Fed liftoff, to yday’s lows
• Short duration positions are ill-advised because MS models “continue to suggest long positions and are likely do so until momentum in bonds and equity markets changes direction”
• Also, economic data may “disappoint in the coming weeks on the back of tighter financial conditions”
• “We think investors will have ample time to set shorts and still extract value without having to call the low in yields”
• Best way to cover shorts is by buying long-end TIPS, “which are cheap relative to inflation breakevens”
• Relative value opportunities include UST 5/10 steepener at 53bp, target 63bp, stop at 50bp, as 10Y point “looks rich” to 5Y point on the UST curve